Investing.com -- Shares in ServiceNow (NYSE:NOW) fell more than 1.5% in premarket trading Monday after Morgan Stanley analysts downgraded the stock to Equal Weight from Overweight.
The move comes after the cloud software maker’s shares soared nearly 70% over the past year, significantly outperforming the software sector’s average gain of 23%.
The surge has pushed ServiceNow’s valuation above Morgan Stanley's previous price target of $900. The Wall Street firm has lifted the price target to $960.
Morgan Stanley’s decision reflects concerns about the lack of "meaningful valuation upside" despite stable demand and solid execution.
The analysts note that ServiceNow shares are trading at 1.9 times enterprise value (EV) to forecasted 2025 free cash flow (FCF) growth, in line with the large-cap average, “and well ahead of system of record comps.”
Moreover, while ServiceNow's Pro Plus adoption remains a growth driver, analysts note increasing customer hesitancy regarding its pricing, which has started to elongate deal cycles.
“While we nonetheless continue to believe in strong adoption with Pro Plus, we see this as largely priced in and highlight that seat-based pricing concerns have taken a backseat in our investor conversations,” analysts saisd.
“Despite similar opportunities and similar risks across these core comps, multiples are pricing very different expectations.”
Lastly, Morgan Stanley also highlighted the uncertainty around product leadership following the departure of CJ Desai ServiceNow's former president, who left amid internal investigations.
Although the company has appointed Chris Bedi as interim Chief Product Officer, Morgan Stanley voiced concerns about potential long-term impacts on the company's product development and leadership.
“Taken together, while we see ServiceNow's execution on track, product leadership and adoption of the Pro Plus SKU intact, and near-term setup achievable, we step to the sidelines as we believe these factors are largely priced in at current valuation,” analysts concluded.