Why ServiceNow (NOW) Shares Are Sliding Today

Radek Strnad /
2024/07/08 11:31 am EDT

What Happened:

Shares of enterprise workflow software maker ServiceNow (NYSE:NOW) fell 5.2% in the morning session after Guggenheim analyst, John Difucci, downgraded the stock's rating from Neutral to Sell and assigned a price target of $640. The price target represents a potential 15% decline from where shares traded when the downgrade was announced. The analyst's revision was based on fieldwork, which suggested that the anticipated uptick in ServiceNow's GenAI business in the second half of the year (2024) might not materialize until 2025. 

He added, "Partner checks were generally positive for 2Q, but not as positive as they usually are. Several partners expressed concern about 2H24, especially since GenAI monetization is not happening en masse and is not likely to materialize this year, as management has suggested it would."

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What is the market telling us:

ServiceNow's shares are quite volatile and over the last year have had 2 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business. 

The biggest move we wrote about over the last year was about a month ago, when the company dropped 10% following disappointing earnings results from peers Salesforce.com (CRM) and Uipath (PATH). The former is one of the largest enterprise software platforms in the world, and the latter specializes in automation software to eliminate manual and redundant tasks throughout an enterprise. 

Firstly, CRM reported first-quarter earnings, with key topline metrics, including revenue and billings, falling below expectations. The company experienced softer bookings in the quarter due to elongated deal cycles, deal compression, and high levels of budget scrutiny. The guidance also includes expectations for the measured buying behavior observed in Q1 to continue throughout the fiscal year, which likely points to a challenging sales environment for software companies. 

Additionally, UiPath reported first quarter earnings results and lowered its full-year revenue guidance, falling significantly short of Wall Street's expectations. The company noted it saw, "increased deal scrutiny and lengthening sales cycles for large multi-year deals." Besides the company-specific challenges, UiPath's performance suggests weaker demand for automation software products and solutions in the near term. 

Overall, the earnings season was choppy for software providers, with a number of them citing macro or customer challenges. While NOW's latest earnings results were quite solid, these more recent results and the resulting stock action are telling us that the market is pricing in the potential for weakness in NOW's coming quarters.

ServiceNow is up 12.2% since the beginning of the year, and at $771.66 per share it is trading close to its 52-week high of $812.94 from February 2024. Investors who bought $1,000 worth of ServiceNow's shares 5 years ago would now be looking at an investment worth $2,634.

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