Cloud Computing Giant ServiceNow In Buy Zone After AI News

Key Points

• S&P component ServiceNow reported impressive Q2 results, beating revenue and earnings expectations. 
• The company announced several new AI initiatives, including partnerships with Nvidia, Accenture and KPMG. 
• The stock has shown steady growth above its 50-day moving average and rallied 23.97% in the past three months.
• For the full year, the company forecasts subscription revenue growth of 24.5% to 25%, better than analysts' expectations.

Shares of ServiceNow Inc. NYSE: NOW may be down since the company’s July 26 earnings report, but this isn’t a stock to count out. 

In fact, the current pullback may offer a buy opportunity, as the company beat revenue and earnings views, boosted its full-year guidance, and is continuing to make inroads when it comes to AI implementation. 

You may not be familiar with ServiceNow, as it’s not one of the more glamorous AI-related companies, nor is it one of the big-name techs with a big consumer presence, like Apple Inc. NASDAQ: AAPL or Microsoft Corp. NASDAQ: MSFT. 

ServiceNow is a cloud computing company that provides a comprehensive platform for enterprise workflow management. It helps customers streamline and automate various processes, such as infotech service management, human resources, customer service, and network security operations. 

New AI Initiatives

In the most recent earnings report, the company touted recent developments regarding AI implementation. Those included:

• In the quarter, ServiceNow delivered new features that will embed generative AI across its platform, to drive further automation. 
• The company announced further generative AI capabilities with case summarization and text‑to‑code, and the introduction of its AI Lighthouse program with Nvidia Corp. NASDAQ: NVDA and tech consulting firm Accenture plc NYSE: ACN to assist customers across industries in the design, development, and implementation of new generative AI use cases.
• It also announced an expanded partnership with global accounting firm KPMG to develop AI offerings in the areas of finance, supply chain, and procurement operations. 

ServiceNow has a market capitalization of $116.19 billion, meaning the Santa Clara, California company is easily big enough to be an S&P 500 component. It carries a weighting of 1.37% within the S&P tech sector, which isn’t enough to move the needle on sector performance all by itself.

Like pretty much all things tech, the stock began declining in late 2021, and skidded last year. In the past three months, ServiceNow shares rallied 23.97% in the past three months and the stock is up 46.69% year-to-date, outpacing the performance of the Technology Select Sector SPDR Fund NYSEARCA: XLK, of which it is a component.

Support Above 50-Day Average

The ServiceNow chart shows a stock that’s been trending steadily higher above its 50-day moving average. It retreated 2.14% the week ended July 28, but finished 3% above that key indicator, signaling that investors may be taking some profits after a strong run-up, and are not stampeding for the exits. 

If the current pullback continues getting support at or above the 50-day moving average, it would remain actionable. However, if it skids below that line, or rises more than 5% above the July 19 high of $614.36, then it’s best to wait for another consolidation or base. 

ServiceNow’s earnings of $2.37 a share marked a year-over-year increase of 46%, while revenue grew 23% to $2.15 billion. The company exceeded Wall Street views on both the top and bottom lines, as you can see using MarketBeat’s ServiceNow earnings data. 

For the current quarter, the company expects subscription revenue to grow in a range between 25.5% to 26%. It expects current remaining performance obligations, which is contract revenue that will be recognized as revenue in the next 12 months, to grow by 25.5% in the quarter.

Better-Than-Expected Growth Forecast

For the full year, ServiceNow sees subscription revenue growing by 24.5% to 25%. That was better than analysts had expected. 

Both earnings and revenue grew at double-digit rates in each of the past eight quarters. If there’s any fly in the ointment, it’s that analysts expect earnings to decline by 14% this year, to $6.50 share, before growth resumes in 2024.

The 2023 earnings decline won’t necessarily ding the stock’s price, though, especially if the company beats expectations and offers upbeat guidance. 

MarketBeat’s ServiceNow analyst ratings show a consensus view of “moderate buy.” In July, starting even before the company’s most recent quarterly report, 14 analysts boosted their price target on the stock. The consensus target is now $589.48, an upside of 3.50%, but every single one of the updated price targets in July is $600 or more, a sign of growing confidence in the stock.