Why ServiceNow (NOW) Stock Is Nosediving

Jabin Bastian /
2024/05/30 12:08 pm EDT

What Happened:

Shares of enterprise workflow software maker ServiceNow (NYSE:NOW) fell 10% in the morning session after 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, this earnings season has been 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.

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What is the market telling us:

ServiceNow's shares are quite volatile and over the last year have had one move greater than 5%. But moves this big are very rare even for ServiceNow and that is indicating to us that this news had a significant impact on the market's perception of the business. 

The biggest move we wrote about over the last year was about a month ago, when the stock dropped 7.6% on the news that the company reported first-quarter earnings results. One negative was that calculated billings missed by 0.5%, and large customer net adds slowed a bit from historical pace. 

Guidance was another reason why the stock traded down. Subscription revenue guidance for next quarter missed by about 3% and implies 22% (constant currency) growth, further deceleration from this quarter. Full year guidance was maintained from previous and calls for ~30% operating and FCF margins. Overall it was a fine quarter. cRPO (calculated remaining performance obligations - leading growth indicator) beat by 0.4% (essentially in line), total RPO beat by 2.8%, subscription rev beat by 0.3% (in line), total revenue beat by 0.6%, adjusted EBIT beat by 5%, and FCF beat by 24%. Subscription revenue grew 24.5% yoy (constant currency), which is healthy and not much of a deceleration from last quarter's 25.5% yoy (constant currency) growth. 

Overall, the company is growing at a healthy pace at scale and growing profitably. Small expectations misses can cause some share price volatility in the short term as the market wrestles with valuation for a fairly expensive company, and this is what we're witnessing.

ServiceNow is down 4% since the beginning of the year, and at $659.73 per share it is trading 18.8% below 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 $2,512.

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