Workflow automation leader ServiceNow (NOW 1.95%) delivered an outstanding update in its fourth-quarter results last week, but the stock tumbled. It has lost nearly half its value over the past year, but is that a reason for investors to stay away, or is it a buying opportunity? Let's take a look.
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AI and high growth
ServiceNow is reporting strong growth and high profitability. Here are some of the fourth-quarter highlights:
- Sales increased 20% year over year.
- The renewal rate was 98%.
- It had $12.85 billion in current remaining performance obligations.
- It had $0.92 in earnings per share, a 26% year-over-year increase.
The main reason the stock tanked is that software-as-a-service (SaaS) stocks are out of favor with the market right now, which is concerned about how artificial intelligence (AI) could take over many of the tasks companies pay for today. For example, hyperscalers are investing in cloud-based services, where clients can use generative AI for coding and to create applications instead of forking over monthly payments for many different subscription services.
NYSE: NOW
Key Data Points
Fears, risks, and valuation
While it remains to be seen whether AI will wipe out SaaS companies' businesses, the market is already taking this into account. Does that create an opportunity?
ServiceNow calls itself the "control tower" of a company, and more than 8,000 clients rely on its software to run their businesses more efficiently. This business is not going to disappear so fast. On top of that, the company is pivoting to use AI to its advantage and offer a better product. It's not unlike the fears about Alphabet losing ground to ChatGPT and other large-language models (LLMs), while the company has also used AI to its advantage.
ServiceNow has a leading position as well, and it's integrating AI into its organization to offer more value to clients and keep its lead. It announced several major deals recently, including one with OpenAI to integrate ChatGPT models into its software, and another with Anthropic for clients to create workflow applications using the Claude LLM.
Investors remained unimpressed. After the beating it took last week, ServiceNow stock is down 45% over the past year and trades at a price-to-earnings (P/E) ratio of 32. That's reasonable for a company reporting double-digit growth. And although it's been around for a while, it still has healthy growth opportunities along with a recurring revenue stream.
There may continue to be more downside as the market figures out what to do with SaaS companies, but this does look like an opportunity to buy on the dip.
