By ServiceNow stock plunged by double digits in the extended hours after the software giant published its financial results. NOW dropped by nearly 20% to $121, its lowest level since August 21, and 24% below its highest point this year. The sell-off has undone most of the gains it made in the past few months when it jumped from $81 in April to $160.
ServiceNow’s sell-off reflects slowing RPO growth expectations, not its AI momentum.
51% of retail investor accounts lose money when trading CFDs with this provider.
NOW stock suffered a big reversal after the company published its financial results. An immediate look at the report shows that the company did modestly well as the results were better than expected. It also raised its full-year guidance.
The company said that its revenue rose by 20.5% in the quarter to $4.1 billion, higer than what analysts were expecting. This revenue growth was mostly because of its organic business and its acquisitions. It spent $7.75 billion acquiring Armis, a company in the security industry.
The results also showed that its remaining performance obligations (RPO) rose by 22% to $29.7 billion. Also, its AI annual contract value has now soared to over $1.7 billion. The company’s president said:
“Our AI momentum continues to build, with AI net new ACV exceeding expectations and enabling us to raise our year-end target for the second time this year, from $1 billion at the start of the year to $1.7 billion now.”
Therefore, the stock is falling as investors remain concerned about the impact of the ongoing AI boom to its business. For one, while the RPO growth was strong, the company expects it to grow by 18.5% in the fourth quarter, lower than the 22% it experienced in Q3.
The stock also dropped as the cost of doing business jumped. It spent over $1.05 billion in the quarter after spending $666 million in the same period last year.
Still, to a large extent, there are signs that investors are overreacting to this report as ServiceNow has demonstrated that it can continue growing its business.
ServiceNow is already being used by some of the biggest companies in the world like Honeywell, Lenovo, CVS, and FedEx. It is highly unlikely that these firms will cancel their subscriptions and move the workload to AI agents.
At the same time, analysts still expect ServiceNow to generate double digit revenue growth. The average estimate among analysts is that the annual revenue will be $16.2 billion, up by 22% from a year earlier. It will then grow by 18% next year.
Most notably, ServiceNow has become fairly cheap, compared to where it was a while ago. Its forward price-to-earnings ratio of 38 is lower than the five-year average of 56.
NOW stock chart | Source: TradingView
The chart above shows that ServiceNow stock plunged by double digits in the extended hours. In the short-term, this sell-off may continue as analysts start reducing their price targets.
However, in the medium term, there is a likelihood that the stock will bounce back as investors adjust to the new normal. This rebound may see it rise to $138, which coincides with the highest swing in June this year.