High Potential For A Mean Reversion Trade In ServiceNow

ServiceNow Inc (NYSE: NOW) reported strong Q4 2016 results ahead of expectations. D.A. Davidson’s Jack Andrews recommended investors to accumulate the company’s shares ahead of “what we expect to be a mean reversion trade.” The analyst maintains a Buy rating on the company, with a price target of $102.

Q4 Performance

ServiceNow reported its quarterly revenue at $385.7 million, ahead of D.A. Davidson’s estimate of $383.5 million and consensus expectation of $379.5 million. The beat came despite a ~2 percent foreign exchange headwind during the quarter.

Non-GAAP EPS came in at $0.24, beating D.A. Davidson’s and Street’s estimate of $0.23. “Without the FX headwind, EPS would have been $0.04 higher,” analyst Andrews noted. Billings were recorded at $534.8 million, handsomely beating DA Davidson’s estimate of $485 million and the consensus expectations of $477.6 million.

ServiceNow added a number of large deals during the quarter. “While ITSM (IT Service Management) continues to account for the majority of net new ACV, ITOM (IT Operations Management) and other emerging products (including HR, security operations, and customer service management) continue to gain traction with customers,” Andrews wrote.

Mean Reversion Trade

ServiceNow’s shares have significantly underperformed software peers over the past 52 weeks. Shares have appreciated 10.8 percent, versus a 23.8 percent gain for the Nasdaq. Given ServiceNow’s current business momentum, investors should accumulate shares “in front of what we expect to be a mean reversion trade,” the analyst commented, as expects the share price to "catch up.”

At last check, shares of ServiceNow were up 4.45 percent at $90.20.