ServiceNow Stock: Likely Low Performance, Hold (NYSE: NOW)

ServiceNow office building in Silicon Valley

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Price Action Thesis

We track a detailed analysis of the price action on ServiceNow (NYSE: NOW) stock after our previous article in April. There has been some noticeable improvement in its price actions that we think investors should consider.

Notably, a bear trap (significant decline in selling momentum) was formed in May, but price action was resolved by another bull trap (significant decline in buying momentum) in June. NOW is also firmly embedded in a bearish bias, and its medium-term trend has begun to move into a downtrend. Therefore, we prioritize its bull trap in June and urge caution.

Despite this, we expect a solid re-evaluation of its near support ($ 405), which coincides with its critical 200-week moving average support. If NOW loses that level of support, we could see a steeper decline as the momentum of its recovery declined in June. Therefore, we urge investors to be patient and wait for the review first.

Also, our valuation model suggests that adding to current levels may disappoint investors hoping to repeat NOW’s 5Y total return CAGR outperformance against the market. Therefore, we suggest the level that investors should consider increasing to help achieve the market-perform hurdle rate.

As such, we repeat our Hold rating on NOW stock.

NOW – June’s Bull Trap Declined Additional Inverted Buying

NOW is price chart

NOW is price chart (TradingView)

A closer inspection of NOW’s weekly chart helps release significant clues to its price action. Interestingly, NOW has firmly moved into a bearish flow, as the series of bull traps has rejected its attempt to recapture its bullish bias.

May’s bear trap helped generate near-term support ($ 405). However, it was quickly resolved by another lower-high bull trap in June that created its near resistance ($ 500).

Consequently, a series of lower-high bull traps is not conducive for NOW price action, as it proves the market’s intentions to continue its bearish bias. Furthermore, if NOW does not regain its near resistance, it could move into a strong downtrend, possibly leading to a steeper decline in the future.

We noticed that NOW built its May bear trap near its 200-week moving average support (purple line), most likely its “last line of defense” for its uptrend. As such, we urge investors to avoid taking the trigger and watch for potential re -testing of its near support first.

ServiceNow’s Growth Is Not Enough To Justify Its Appreciation

% of the change in ServiceNow revenue and % of the consensus estimates on the change in EBIT

% of the change in ServiceNow revenue and % of the consensus estimates on the change in EBIT (S&P Cap IQ)

ServiceNow has delivered rapid revenue growth over the past five years, posting a 5Y revenue CAGR of 33.5%, which is more than many of the leading software that comes with it.

However, investors are encouraged to look forward because the company’s growth rates are expected to be modest. For example, consensus estimates indicate that ServiceNow’s revenue growth is expected to moderate to 26% in FY22 before dropping to 23.6% in FY24. Notably, its fixed EBIT growth is expected to slow from its pre-COVID metrics.

ServiceNow FCF margins % at adjusted EBIT margins % consensus estimates

ServiceNow FCF margins % at adjusted EBIT margins % consensus estimates (S&P Cap IQ)

However, ServiceNow has a very high free cash flow (FCF) generative business model. As a result, it has helped the company deliver stable FCF margins in recent years.

However, gains in operating leverage are also estimated to have slowed, as seen above. We believe this is consistent with the dramatic slowing of topline growth. Investors should not expect ServiceNow to “squeeze” more operational efficiency while managing to moderate revenue growth. Therefore, we believe that the consensus estimates are appropriate.

Also, due to ServiceNow’s aggressive growth metrics, it may be susceptible to a reduction in corporate IT spending if the macro environment worsens. Consequently, we believe it may affect its growth.

Stock

NOW

Current market cap $ 92.29B
Hurdle rate (CAGR) 10%
Projection by CQ4’26
FCF yield is required in CQ4’26 5.5%
Assumed TTM FCF margin at CQ4’26 32%
Indicated TTM income of CQ4’26 $ 24.36B

NOW reverse cash flow valuation model. Data source: S&P Cap IQ, author

NOW last traded at an FCF yield of 2.47%, higher than its 5Y mean of 2.16%. But, keep in mind that ServiceNow has delivered rapid revenue and profitability growth over the past five years. Therefore, with slowing growth rates, we believe the market is likely to seek higher yields until FY24.

We applied a market-underperform hurdle rate of 10%. This is a significant downgrade from NOW’s 5Y total return CAGR of 35.19%. Therefore, we believe that increasing its FCF yield to at least 5.5% is appropriate.

As a result, our model suggests that ServiceNow would need to post TTM revenue of $ 24.36B through CQ4’26. However, revised consensus estimates indicate it could deliver revenue of $ 11.47B in FY24. Therefore, we are not convinced that ServiceNow will meet our revenue target at its current value.

Therefore, we urge investors to consider waiting for a deeper return to help them potentially achieve the market-perform hurdle rate of 15%. Accordingly, we changed our entry level to $ 310 (located in the gap between its near term and intermediate support). We keep the other parameters unchanged. Accordingly, we are requesting ServiceNow to post revenue to TTM of $ 16.39B through CQ4’26, which we think will be achievable.

Is the Stock NOW a Buy, Sell, or Hold?

We are repeating our Hold rating to NOW.

Our analysis of price action suggests that caution is needed, as NOW declined in its imminent resistance again. Along with its bearish flow and potential downtrend development, its price action is not conducive for dip buying.

Our valuation model suggests that investors are unlikely to perform in the market if they add to current levels. Instead, they should consider layering at less than $ 310 to help them achieve the market-perform hurdle rate of 15%.

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