If CEOs want their stock price to go up, their company must beat the goals analysts set for the last quarter and raise their forecast above consensus expectations.
ServiceNow— the Santa Clara, California-based maker of applications that help companies organize and automate their personnel and information technology operations — beat expectations but slightly disappointed analysts on its revenue forecast.
Investors responded by sending ServiceNow shares down over 4% after the company announced first quarter 2024 results on Wednesday.
That drop could be a buying opportunity. Here are three reasons:
ServiceNow disagrees with analysts’ conclusion that the company’s revenue forecast is “weak.”
ServiceNow grew revenue and profit briskly because clients view the company’s services as an investment that boosts their productivity — helping them manage the economic challenges of inflation and high interest rates.
ServiceNow’s high payoff generative AI applications are contributing to the company’s growth and future opportunities
ServiceNow sees a bright future ahead.
ServiceNow’s Performance And Prospects
ServiceNow’s first quarter performance was better than expected while investors appeared unenthusiastic about the company’s revenue growth forecast for the current quarter.
Here are the key numbers:
Q1 2024 revenue: $2.6 billion — up 24% and $10 million above consensus as tracked by FactSet, noted Investor’s Business Daily.
Q1 2024 subscription revenues: $2.523 billion — up 24.5% in constant currency, $10 million above the consensus, IBD reported.
Q1 2024 current remaining performance obligations: $8.45 billion — a 21% increase from the year before and $40 million above consensus, according to IBD.
Q1 2024 adjusted earnings per share: $3.41 — a 44% increase from the year before and 27 cents per share above the consensus, reported Reuters.
Q2 2024 subscription revenue forecast: A rangebetween $2.525 billion and $2.530 billion — the midpoint of which is about $1 million below the $2.54 billion London Stock Exchange consensus according to Reuters.
The stock market’s reaction to ServiceNow’s subscription revenue forecast prompted the company to challenge the accuracy of the consensus forecast. “Consensus does not take FX into account, so what was stated as weak Q2 guidance is not accurate, as we have a very solid Q2 guide,” a ServiceNow spokesperson wrote me in an April 24 email.
ServiceNow explained foreign exchange was not included in the consensus. “As we stated in the earnings call, foreign exchange shifted from being a Q2 tailwind to a headwind. We factored that into our full year and Q2 guidance – increasing FY subscription revenues by $20M to more than offset the $17M FX impact, reflecting our optimism for FY24,” the spokesperson pointed out.
ServiceNow conveyed great enthusiasm about the company’s performance and prospects. “Big picture, we beat on the high end of guidance in revenue and profitability,” ServiceNow CEO Bill McDermott told me in an April 24 interview.
“We are growing faster than the industry, have loyal customers who are getting economic value from our products on the top and bottom line, and we are winning big customers such as IBMIBM
, Bank of New York MellonBank of New York Mellon
, MicrosoftMicrosoft
and others,” he added.
ServiceNow Is Winning Large Client Accounts Through “Process Optimization”
ServiceNow pitches itself to customers as an AI platform for business transformation which the company has been developing for over five years. “Over five years ago, we began working with Nvidia and talent at ServiceNow has been growing,” McDermott told me.
With inflation and interest rates high and many companies still operating old cumbersome systems, their leaders are realizing that “noone will help companies deal with the challenges,” he added.
Customers are increasingly viewing process optimization as the leading generative AI application. “Software is the deflationary force for productivity. We enable customer to get rid of old platforms. Some of them are operating 200 enterprise resource planning systems,” he added.
These happy customers are boosting ServiceNow’s prospects. “Ten of the top 20 deals of the company have been distinguished with GenAI in mind; it is starting to show, because we have deals with $10 million and more grow 300% year over year,” McDermott told Reuters.
ServiceNow has 1,933 clients with more than $1 million in annual contract value — up 15% from the year before — including Zoom Video, Standard Chartered Bank and Delta Air LinesDelta Air Lines
, Reuters noted.
In contrast to peer enterprise companies like IBM and SalesforceSalesforce
, ServiceNow is proud to have shunned big acquisitions. “We don’t need an acquisition due to our massive growth,” McDermott told Bloomberg.
ServiceNow’s Generative AI Applications Portend Future Growth
In Silicon Valley, it used to be popular to say a startup ate its own dog food — meaning the company used its products for internal operations.
This is true for ServiceNow — which uses its technology to develop high-payoff applications of generative AI — thereby improving internal productivity and enabling the company to demonstrate these benefits to potential customers. “We have 20 generative AI use cases that I just presented to my board of directors,” McDermott said.
ServiceNow is using generative AI in customer and employee service and software development. When a customer calls seeking service, most calls are sent to a virtual assistance that resolves the problem quickly and accurately using natural language. When an employee, for example, wants to take maternity leave, generative AI handles the request. Meanwhile, AI-powered chatbots make coders 48% more productive, he told me.
ServiceNow offers generative AI-powered services to customers through its Now Assist chatbot for which the company charges extra. “Now Assist is available across all platforms in our professional-plus pricing plan,” the company’s chief commercial officer Paul Smith told me as I wrote in a March 2024 Forbes post.
Anecdotal evidence looks positive for customer adoption of ServiceNow’s generative AI products. “In Q1, our gen AI products continue to see very healthy adoption,” CFO Gina Mastantuono told investors during ServiceNow’s Q1 2024 earnings call transcript.
“As Bill mentioned, our Pro Plus net new ACV to date continued the trend ahead of any new product family launched for the comparable period. Our gen AI products were in seven of our top 10 deals,” she added.
What Analysts Are Saying
Analysts are bullish on the company while skittish due to the high expectations baked into the stock. The analyst consensus on ServiceNow “is a Strong Buy with an average price target of $861.44, implying 20% upside from current levels,” according to TipRanks.
Analysts are very picky about mismatches between their expectations and what ServiceNow delivers. The results were “just a bit below what are always high expectations,” for the company, wrote Kirk Materne, an analyst at EvercoreEvercore
ISI who was featured in a Bloomberg report.
Before ServiceNow’s earnings report, Guggenheim analyst John DiFucci wrote ServiceNow’s high valuation meant any “hiccups” in its earnings report could spur investors to sell the stock, Bloomberg wrote.
That seems be what happened on April 24. However, the lower valuation could be an opportunity for investors seeking a way to profit from growth among enterprise customers seek big increases in productivity from generative AI.
