Wall Street Analysts Think ServiceNow (NOW) Is a Good Investment: Is It?

ServiceNow (NOW) currently holds an average brokerage recommendation (ABR) of 1.32, approximating a 'Buy' rating based on 41 brokerage firms' recommendations, with 82.9% as 'Strong Buy'; however, the article suggests that investors should not rely solely on ABR due to inherent biases of brokerage firms. The article promotes using the Zacks Rank, a tool driven by earnings estimate revisions, to validate investment decisions, noting that ServiceNow's unchanged consensus estimate of $16.51 and other factors contribute to a Zacks Rank #3 (Hold), suggesting caution despite the positive ABR.

Analysis

ServiceNow (NOW) exhibits a strong Average Brokerage Recommendation (ABR) of 1.32, on a 1 to 5 scale, positioning it between a 'Strong Buy' and 'Buy' based on assessments from 41 brokerage firms. Notably, 34 of these recommendations (82.9%) are 'Strong Buy' and three (7.3%) are 'Buy'. However, the article cautions against relying solely on ABRs due to a documented tendency for sell-side analysts to exhibit a positive bias, with brokerage firms reportedly issuing five 'Strong Buy' recommendations for every 'Strong Sell'. In contrast to the bullish ABR, ServiceNow's Zacks Rank is #3 (Hold). This rating is derived from a quantitative model focused on earnings estimate revisions, which for ServiceNow, have seen the Zacks Consensus Estimate for current year earnings remain unchanged at $16.51 over the past month. This stability in earnings estimates suggests that ServiceNow's stock might perform in line with the broader market in the near term, warranting a more cautious stance than the ABR might imply. The analysis underscores the importance of using tools like the Zacks Rank, which prioritize earnings estimate trends, to validate or provide a counterpoint to traditional brokerage recommendations.

Key Decisions for Investors

• Investors should treat ServiceNow's highly positive Average Brokerage Recommendation (ABR of 1.32) with a degree of skepticism due to the inherent positive bias often found in sell-side analyst ratings.
• Consider ServiceNow's Zacks Rank #3 (Hold), which reflects an unchanged consensus earnings estimate of $16.51 for the current year, as an indicator that the stock may perform in line with the broader market in the near term.
• It is prudent to use ABRs to supplement, rather than solely guide, investment decisions, giving significant weight to quantitative, earnings-driven metrics like the Zacks Rank for a more balanced perspective on ServiceNow's potential.