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Why ServiceNow (NOW) Could Beat Earnings Estimates Again

ServiceNow (NOW) has an impressive earnings surprise history and currently possesses the right combination of the two key ingredients for a likely beat in its next quarterly report.

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This story originally appeared on Zacks

Looking for a stock that has been consistently beating earnings estimates and might be well positioned to keep the streak alive in its next quarterly report? ServiceNow (NOW), which belongs to the Zacks Computers - IT Services industry, could be a great candidate to consider.

- Zacks

When looking at the last two reports, this maker of software that automates companies' technology operations has recorded a strong streak of surpassing earnings estimates. The company has topped estimates by 15.88%, on average, in the last two quarters.

For the most recent quarter, ServiceNow was expected to post earnings of $1.20 per share, but it reported $1.42 per share instead, representing a surprise of 18.33%. For the previous quarter, the consensus estimate was $1.34 per share, while it actually produced $1.52 per share, a surprise of 13.43%.

Price and EPS Surprise

With this earnings history in mind, recent estimates have been moving higher for ServiceNow. In fact, the Zacks Earnings ESP (Expected Surprise Prediction) for the company is positive, which is a great sign of an earnings beat, especially when you combine this metric with its nice Zacks Rank.

Our research shows that stocks with the combination of a positive Earnings ESP and a Zacks Rank #3 (Hold) or better produce a positive surprise nearly 70% of the time. In other words, if you have 10 stocks with this combination, the number of stocks that beat the consensus estimate could be as high as seven.

The Zacks Earnings ESP compares the Most Accurate Estimate to the Zacks Consensus Estimate for the quarter; the Most Accurate Estimate is a version of the Zacks Consensus whose definition is related to change. The idea here is that analysts revising their estimates right before an earnings release have the latest information, which could potentially be more accurate than what they and others contributing to the consensus had predicted earlier.

ServiceNow has an Earnings ESP of +4.32% at the moment, suggesting that analysts have grown bullish on its near-term earnings potential. When you combine this positive Earnings ESP with the stock's Zacks Rank #2 (Buy), it shows that another beat is possibly around the corner. The company's next earnings report is expected to be released on October 27, 2021.

With the Earnings ESP metric, it's important to note that a negative value reduces its predictive power; however, a negative Earnings ESP does not indicate an earnings miss.

Many companies end up beating the consensus EPS estimate, but that may not be the sole basis for their stocks moving higher. On the other hand, some stocks may hold their ground even if they end up missing the consensus estimate.

Because of this, it's really important to check a company's Earnings ESP ahead of its quarterly release to increase the odds of success. Make sure to utilize our Earnings ESP Filter to uncover the best stocks to buy or sell before they've reported.



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