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ServiceNow Dips on Guidance Cut, Long-Term Story Still Intact

Story Highlights

ServiceNow stock drops over 7% due to near-term headwinds. Long-term fundamentals remain intact, pointing to solid upside potential.

ServiceNow (NYSE:NOW) fell more than 7% in the after-hours following its guidance cut. It now expects its subscription revenues to increase by 24% in FY22 compared to its previous growth guidance of 26%. Despite near-term headwinds, its long-term fundamentals remain intact with continued strength in key performance metrics.

Factors Hurting Near-Term Growth

ServiceNow provides a cloud computing platform that helps organizations to digitize their workflow and automate business processes. Though ServiceNow is not immune to the dynamic macro and geopolitical environment, it has, until now, managed to navigate the challenges well. 

While the momentum in its business continued in Q2, currency headwinds could hurt its growth in the near term. It’s worth mentioning that international revenue represents about 35% of its total revenues. Thus, an adverse currency movement significantly impacts its growth.

ServiceNow stated that the U.S. dollar has strengthened so far in 2022, resulting in a foreign exchange headwind. It expects an adverse currency impact of approximately $220 million on its FY22 subscription revenues. 

Meanwhile, for Q3, ServiceNow expects currency headwinds to have a negative impact of 4.5%. Also, its cRPO (current remaining performance obligations – a measure of future revenue) is expected to increase by 20% year-over-year.

ServiceNow’s CFO, Gina Mastantuono, expects Q3 cRPO to take a hit of 2% due to the “larger than average customer cohort that renews in Q4.” 

In response to NOW’s Q2 financials and guidance, Oppenheimer analyst Brian Schwartz stated, “ServiceNow reported mixed 2Q results and weaker than expected guidance for 3Q cRPO.” He reduced his near-term estimates and price target to $505 from $600. However, he maintained a Buy recommendation as he expects NOW “can continue to compound revenue and FCF at industry leading growth rates at scale.” 

Bottom Line

ServiceNow’s headwinds are transitory and will likely subside. Moreover, its long-term fundamentals remain intact, reflected by its solid customer acquisitions, high renewal rate, and expected re-accelerate in cRPO in Q4, which bodes well for growth. 

At the end of Q2, NOW had 1,463 customers with more than $1 million in annual contract value. Further, the number of customers with more than $10 million in annual contract value crossed 100. It is expanding its international footprint, while its renewal rate stood very high at 99%. 

NOW stock sports a Strong Buy rating consensus on TipRanks based on 18 unanimous Buy recommendations. Further, analysts’ average price target of $587.75 implies 31% upside potential. Also, with positive indicators from hedge funds and retail investors, ServiceNow stock has an Outperform Smart Score of 9 out of 10

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