Service Today (NYSE: NOW) fell more than 7% in after-hours following its guidance cut. It now expects its subscription revenues to grow 24% in FY22 compared to its previous growth guidance of 26%.
Factors Affecting Proximal Growth
ServiceNow provides a cloud computing platform that helps organizations digitize their workflow and automate business processes. Although ServiceNow is not immune to the dynamic macro and geopolitical environment, it has, so far, managed to navigate the challenges well.
While momentum in its business continued in Q2, currency headwinds could hurt its growth in the near term. It is worth mentioning that international revenue represents approximately 35% of its total revenue. Thus, an adverse currency movement significantly affects its growth.
ServiceNow said the US dollar has strengthened so far in 2022, resulting in a foreign exchange headwind. It expects an adverse currency impact of around $220 million on its subscription revenues in FY22.
Meanwhile, for Q3, ServiceNow expects currency headwinds to have a negative impact of 4.5%. Also, its cRPO (current outstanding performance obligations – a measure of future earnings) is expected to increase by 20% year-on-year.
ServiceNow CFO Gina Mastantuono expects Q3 cRPO to take a 2% hit due to a “larger-than-average customer cohort renewing in Q4.”
In response to NOW’s Q2 financials and guidance, Oppenheimer analyst Brian Schwartz said, “ServiceNow reported mixed 2Q results and weaker-than-expected guidance for 3Q cRPO.” He cut his near-term estimates and price target to $505 from $600. However, he maintains a Buy recommendation because he expects NOW “can continue to consolidate revenue and FCF at industry-leading scale growth rates.”
Bottom Line
ServiceNow’s headwinds are short-lived and likely to subside. Moreover, its long-term fundamentals remain intact, reflected by robust customer acquisition, high renewal rates, and an expected acceleration 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. Additionally, the number of customers with more than $10 million in annual contract value has crossed 100. It is expanding its international footprint, while its renewal rate stands at a very high 99%.
NOW the stock sports a Strong Buy rating consensus on TipRanks based on 18 unanimous Buy recommendations. Plus, analysts’ average price target of $587.75 indicates a 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.
Disclosure