Why Investors Shouldn't Be Surprised By ServiceNow, Inc.'s (NYSE:NOW) 34% Share Price Surge

Those holding ServiceNow, Inc. (NYSE:NOW) shares would be relieved that the share price has rebounded 34% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Looking back a bit further, it's encouraging to see the stock is up 35% in the last year.

After such a large jump in price, ServiceNow may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 17.4x, when you consider almost half of the companies in the Software industry in the United States have P/S ratios under 4.6x and even P/S lower than 1.7x aren't out of the ordinary. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

We've discovered 2 warning signs about ServiceNow. View them for free.

Check out our latest analysis for ServiceNow

How ServiceNow Has Been Performing

ServiceNow certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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How Is ServiceNow's Revenue Growth Trending?

In order to justify its P/S ratio, ServiceNow would need to produce outstanding growth that's well in excess of the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 21%. The latest three year period has also seen an excellent 83% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 19% per annum as estimated by the analysts watching the company. That's shaping up to be materially higher than the 16% each year growth forecast for the broader industry.

In light of this, it's understandable that ServiceNow's P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

The strong share price surge has lead to ServiceNow's P/S soaring as well. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of ServiceNow's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.

Plus, you should also learn about these 2 warning signs we've spotted with ServiceNow.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.