Stock Story -
What Happened: Shares of enterprise workflow software maker ServiceNow (NYSE:NOW) jumped 14.1% in the afternoon session after the company reported an impressive "beat and raise" quarter, which was powered by what management considered "elite-level execution." ServiceNow beat on the RPO (remaining performance obligations, a proxy for future revenues) line. Improvement in new large contract wins this quarter was another plus. Adjusted operating income also beat by a meaningful amount, and the company slightly raised its full-year guidance for subscription revenue and operating margin.
Moving on to its AI capabilities, management provided promising insights. NowAssist (AI product) net new ACV doubled quarter-over-quarter and became the fastest-growing new product in the company's history. Notably, the company inked 11 NowAssist deals with $1 million+ ACV in Q2, two of which were over $5 million. Also, the company noted that Dell would be integrating NowAssist. Alongside similar deals, this could significantly accelerate ServiceNow's reach in the AI automation space.
Overall, this was a strong quarter with the company's improved visibility in its deal pipeline providing strong conviction in its near term forecasts. Alongside its AI momentum, investors have ample reasons to stay positive.
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What is the market telling us: ServiceNow's shares are very volatile and over the last year have had 2 moves 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 previous big move we wrote about was 17 days ago, when the company dropped 5.2% on the news that 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."
ServiceNow is up 22.6% since the beginning of the year, and at $845.68 per share, has set a new 52-week high. Investors who bought $1,000 worth of ServiceNow's shares 5 years ago would now be looking at an investment worth $2,950.
