ServiceNow Shares Drop Following Morgan Stanley Downgrade
ServiceNow shares drop over 1.5% in premarket trading on Monday after analysts at Morgan Stanley (NYSE: MS) downgraded the stock from Overweight to Equal Weight.
A Year of Strong Gains
This downgrade follows a year of impressive growth for the cloud software company. ServiceNow’s stock surged nearly 70% over the past year, significantly outperforming the software sector’s average growth of 23%. This rapid rise in share value has pushed ServiceNow’s stock price beyond Morgan Stanley’s original price target of $900, prompting the firm to revise its target to $960.
Concerns Over Valuation
Despite raising the price target, Morgan Stanley expressed concerns about the limited upside potential for ServiceNow’s valuation. The analysts highlighted that, while demand remains steady and the company is executing well, the current valuation doesn’t offer much room for further growth.
ServiceNow shares are currently trading at 1.9 times enterprise value (EV) relative to forecasted free cash flow (FCF) for 2025. This puts it in line with the large-cap average but well ahead of comparable system-of-record companies.
Pricing and Growth Challenges
Morgan Stanley also pointed to growing concerns around the pricing of ServiceNow’s Pro Plus offering, which remains a key growth driver. However, customer hesitation regarding the platform’s pricing has begun to extend deal cycles, raising questions about sustained growth.
While analysts remain optimistic about Pro Plus adoption, they noted that pricing concerns are increasingly taking a backseat in investor discussions. “Despite similar opportunities and risks across core competitors, multiples reflect different expectations,” the report stated.
Leadership Uncertainty
Another factor affecting the downgrade is uncertainty surrounding product leadership. The recent departure of CJ Desai, the company’s former president, amid internal investigations has raised questions about ServiceNow’s future direction. Although Chris Bedi has been appointed interim Chief Product Officer, Morgan Stanley expressed concerns about potential long-term impacts on product development and leadership.
Conclusion
ServiceNow’s strong performance over the past year has led to a high valuation, but Morgan Stanley’s downgrade highlights potential challenges ahead. These include valuation limits, pricing concerns, and leadership changes that could impact the company’s growth trajectory.
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