ServiceNow slumps 12% in wake of CEO's economic comments

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ServiceNow (NYSE:NOW) shares slumped as much as 12% Tuesday as investors reacted negatively to some comments about the cloud-software company's business from Chief Executive Bill McDermott.

During a TV appearance on CNBC late Monday, McDermott spoke cautiously about larger economic issues such as increases in interest rates, the strength of the U.S. dollar, rising energy costs and the ongoing war between Ukraine and Russia. McDermott suggested that confluence of such factors is causing some customers to re-consider spending priorities and look more at products that deliver a faster return on their investments.

Analyst Brad Reback, of Stifel, said the matters that McDermott spoke about are likely not just an issue with ServiceNow (NOW), but "are likely to be felt across the [software] group" and he expects to see "downward estimate revisions" from several software companies in the weeks ahead.

As ServiceNow (NOW) declined, other cloud software stocks put in mixed performances as trading progressed Tuesday.

Salesforce (CRM) was off by more than 4%, Adobe (ADBE) slipped by 1.6%, Workday (WDAY) shares gave up more than 3%, Freshworks (FRSH) fell 10%, Snowflake (SNOW) shed more than 4%, and Microsoft (MSFT) shares gave up more than 2%.

ServiceNow (NOW) is scheduled to report its second-quarter results on July 27. Wall Street analysts currently estimate ServiceNow (NOW) will report a profit of $1.56 a share on $1.77B in revenue for period that ended in June.

Those same analysts currently have a consensus strong buy rating on ServiceNow's (NOW) shares, while Seeking Alpha authors have a hold rating on the company's stock. Seeking Alpha's quant system, which consistently outperforms the market, has a hold rating on ServiceNow's (NOW) shares.

Comments

[Ol' Hickory]

Cramer’s cringeworthy interview with the CEO could not have helped.

[DarienL]

Was stupid of the company to raise long-term guidance when the global and US economy is entering a recession. They will most definitely be affected and look for lowered guidance. I will buy back (sold in the 600s) in the 300s

[Off His Game]

I feel this is mostly baked into these shares in the medium term. Market will react immediately, but multiples on all of these are 1/2 to a 1/3 of what they were a year ago. So some slowdown SEEMS expected.

[leslie mccarver]

There is no one better WORLDWIDE than Bill McDermott to represent NOW. His SAP background makes him unique.
His abilities and contacts will propel the company forward. Will add here. Earnings will be very good I believe. The idiots weren’t listening well yesterday.

[DarienL]

@leslie mccarver So? Even he cannot fight soaring rates + inflation + QT + deep recession. He made a stupid mistake already by raising med term guidance

[SuperPac]

Even after the 12.5% decline so far today, this mufugga is 43X2023 earning. This mo-fo has to drop another 40% from here to get in the vicinity of the neighbourhood of a sane valuation. Crash and burn you crud-chewing bastard.

[DONTIGNY]

@SuperPac wow lots of anger in your soul.

[SuperPac]

@Life's good wow lots of idiocy and mirthless-ness in your soul

[Snoopy86]

@SuperPac you’re buying BMC, right?

[User 31614085]

Yikes 67x P/E?? I didn't even realize there were stocks like that still around!!

[tlapp]

@MJL987 How much would you pay for a company with a projected growth rate of 25-30% per year for the next 3 years and gross margins above 70%?

[MadisonAv]

@tlapp Certainly not 67x earnings. I might be tempted at 30-35x, assuming growth doesn't slow.
Why would anyone pay 67x earnings for this when a company like Google is trading at 20-25x earnings while still growing >20%?

[User 31614085]

@tlapp maybe about half of that...I'd have to study the industry/competitors more to get a sense of how realistic/sustainable those rates are.

also..just took a quick look at the P&L..those gross margins get totally eaten up by R&D and SG&A costs..leaving not much left on the operating profit line.

[User 56360468]

An 11% sell off might be justified for companies marketing to the IT market in general, but ServiceNow's not the one I'd be the most worried about. Their CEO is just being honest about the general economic conditions. There is no shortage of companies lacking the IT expertise that ServiceNow offers. It's a lot harder to downsize that kind of service when you actually need it, compared with downsizing general spending on products and services you don't actually need at the moment.

[cash]

@Found.Alpha Precisely. Signing on to some of these big cloud vendors/offerings is an undertaking that one should be comfortable with getting locked in, paying for a lot of things that yield little value for the ongoing operations. Big budget IT departments can swallow these costs but for most others there are simpler alternatives

[cjsavas]

@Found.Alpha he was very positive in his interview. I recommend watching it if you haven’t already. Too much fear pushing in my opinion

[shcst13]

It's about the valuation. With 10 year ~ 3% and earning estimate is coming down, what is the price per share are you willing to pay to hold NOW?

[Michink]

I bought the dip at -12%

[tlapp]

Glad there was finally some news about this drop. Added a few more shares at this level.

[DigitalTransformer]

It has actually been going on for a little while already, that customers do not renew ServiceNow but instead go to other products that offer more value for money. The thing with ServiceNow is that it is a complex beast that requires a lot of administration and consultancy, similar to ERP systems like SAP. For SAP however customers are willing to pay that hefty price tag because they see it as critical for their business and the demand for it comes directly from the business. With Servicenow that is different, the demand comes from IT most often or from other internal departments (still often seen as cost centers rather than profit centers) and the willingness to spend SAP kind of amounts on software for them is much, much less.
Customers have started looking for products that offer value straight off the bat and the newer products do that better than Servicenow. I am not saying Servicenow is a bad product, I am just saying it was built in a different time with a different approach and companies seem to be less willing to pay the price that comes with that approach.

[Jane Wang, econ prof]

@DigitalTransformer aren't their renewal rates 95%+ still?

[user396]

@DigitalTransformer Right on. 100% for attracting and retaining customers and employees. With today's 11% stock price drop, investors are catching onto the subtle dynamics, punishing CEO for making transparent comments. It'll probably be a while before Bill McDermott comes onto Jim Cramer's Mad Money show again. I predict Cramer has the good sense to have Bill do another interview when market conditions are bullish--try to get back to zero, at least.

[DarienL]

@DigitalTransformer That was true years ago but NOW has become a workflow platform that is in some ways more indispensable than SAP. This company has a long runway and years of growth. That said, stonk is stupidly valued. Buy in the 300s

[Cgain]

Listened to the interview, this take is completely misinterpreted.
He said companies are needing to digitize more than ever, given challenges they are facing. However they prioritizing the software solutions that give them the quickest ROI. Ie. ServiceNow is such a solution that gives very fast ROI

ie. business is strong at NOW.

Overall interview was very positive, heres the link on youtube for anyone who wants to watch:

www.youtube.com/...

Long: NOW

[More Ideas Than Money]

i saw the interview too, cant understand why his comments justify a sell off? seems like the whole 'cloud' market selling off today

[The Real Cavalier]

I listened to the interview and it struck me the CEO said it was extremely important to satisfy customers and keep employees HAPPY but he never mentioned shareholders. I made a mental note to make sure none of my funds own this company.

[Number7]

@DavidHHolmes Shouldn't satisfying customers be the overwhelming priority at any company? With unhappy customers, wouldn't shareholders get poor results due to poor business retention etc?

It seems to me that some of the most successful companies of all time emphasized satisfied customers and happy employees.

[jeanjl]

@DavidHHolmes well, when customers are satisfied & employees (who are highly paid highly motivated professionals) are happy (i.e. happy translated into motivated software work), brilliant products and good revenue growth and ultimately stock price up!
"when you take care of pennies, pound takes care of itself" - an old english saying

[Bankable]

@Number7, agree! Keep customers and employees happy and satisfied shareholders should be the outcome.

Unless management are giving their products to customers for free and paying employees millions each year!