Wall Street expects that when ServiceNow (NOW) announces its results for the quarter ending in September 2020, revenue will increase year-on-year due to increased revenue. Although this widely-known consensus outlook is very important for measuring a company’s income profile, the powerful factor that may affect its recent share price is the comparison of actual results with these estimates.
If these key figures exceed expectations in the upcoming earnings report to be released on October 28, the stock may go higher. On the other hand, if these key data are missed, the stock may go lower.
Although immediate price changes and the sustainability of future earnings expectations will mainly depend on management’s discussion of business conditions on earnings conference calls, it is worth mentioning the possibility of positive earnings per share growth.
Zacks Consensus Estimate
This software company can automate the company’s technical operations and is expected to release quarterly earnings of $1.03 per share in an upcoming report, a year-on-year increase of +4%.
Revenue is expected to reach 1.11 billion US dollars, an increase of 25.3% over the same period last year.
Estimate revision trend
In the past 30 days, the consensus EPS estimate for the quarter remained unchanged. This essentially reflects how coverage analysts collectively reassessed their initial estimates during this period.
Investors should keep in mind that the estimated revision direction of each covered analyst may not always be reflected in the overall change.
Price, consensus and EPS surprise
Earnings whisper
The revision of estimates before the company releases earnings provides clues to business conditions during the results announcement. This insight is at the core of our proprietary unexpected forecasting model (Zacks Earnings ESP (Expected Unexpected Forecast)).
The Zacks Revenue ESP compares the most accurate estimate with the Zacks Consensus Estimate for the quarter; the most accurate estimate is the latest version of the Zacks Consensus EPS estimate. The idea here is that analysts revise their estimates immediately before releasing the earnings report, which may be more accurate than the forecasts they and others made earlier to reach a consensus.
Therefore, in theory, a positive or negative ESP reading indicates that actual income may deviate from the consensus estimate. However, the predictive power of this model is only meaningful for positive ESP readings.
Positive income ESP can be a good predictor of whether earnings exceed expectations, especially when combined with Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). Our research shows that using this combination of stocks will produce surprising surprises almost 70% of the time, and a solid Zacks ranking can actually improve the predictive power of earnings ESP.
Please note that a negative ESP reading does not mean that the surplus has not been reached. Our research shows that for stocks with negative earnings ESP readings (and/or stocks with a Zacks Rank of 4 (sell) or 5 (strong sell)), it is difficult to predict earnings growth with any degree of confidence.
How to shape the numbers for ServiceNow?
For ServiceNow, the “most accurate estimate” is the same as the Zacks Consensus Estimate, which means that no analysts have recently considered opinions different from the consensus estimate. This results in a surplus ESP of 0%.
On the other hand, the stock currently has a Zacks Rank #3.
Therefore, this combination makes it difficult to predict that ServiceNow will exceed the consensus EPS estimate.
Is there any clue that income surprises history?
When calculating the company’s future earnings estimates, analysts usually consider the extent to which the company can match past consensus estimates. Therefore, it is worth trying to understand the surprising history of its impact on the upcoming numbers.
For the last reported quarter, ServiceNow’s earnings per share are expected to be $1.02, while the actual revenue generated is $1.23, which is unexpectedly +20.59%.
In the past four quarters, the company has exceeded earnings per share expectations four times.
Bottom line
Winning or losing may not be the only basis for stocks to rise or fall. Although other factors that disappoint investors led to gains winning, many stocks ultimately lost. Similarly, despite the poor performance, unforeseen catalysts have helped many stocks rise.
In other words, betting on stocks that are expected to exceed earnings expectations does increase the likelihood of success. This is why it is worth checking the company’s ESP and Zacks Rank before the quarterly release. Make sure to use our earnings ESP filter to find the best stocks to buy and sell before reporting.
ServiceNow does not seem to be a compelling profitable candidate. However, investors should also pay attention to other factors in order to bet on the stock or stay away from the stock before its earnings are released.
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