Cloud computing company shares Service Today (NOW -12.32%) reached 11.7% as of 11:40 am ET. The collapse also dragged on other cloud stocks, particularly those specializing in customer relationship management and business digitization. Cloud pioneer Salesforce (CRM -4.41%) dropped 4.1%, and smaller components of customer relationship software HubSpot (HUBS -4.48%) dropped 4%.
For the sake of comparison, the S&P 500 at Nasdaq Composite the indices both rose approximately 0.2% each.
E what now
What is the reason for the sharp decline of ServiceNow? There is no specific financial news to cause the collapse. However, ServiceNow CEO and veteran tech executive Bill McDermott appeared on CNBC’s Mad Money last night and talked about the macroeconomic headwinds that are profoundly affecting the business world today. In particular, McDermott said that a strong and still strengthening U.S. dollar (which negatively affects earnings for companies working outside the states), rising interest rates, inflation, and war in Europe are darkening in the mood among business decision makers.
Due to the current environment, many businesses are restricting spending. McDermott said companies are focusing on tech projects with fast ROI (return on investment). If a project has a long timeline until it starts to pay for itself, it is highly likely that it will be postponed until economic conditions improve.
ServiceNow offers automation software that helps a company digitize a process and become more efficient-just the kind of project that is likely to get the green light. Salesforce and HubSpot have similar software suites with a focus on helping employees use their time more effectively and deliver the right marketing material to prospective customers at the right time. However, cautious words from McDermott are not positively greeted by the market today. Cloud stocks retreated because these “macroeconomic headwinds” could lead to downward revenue fluctuations and revenue growth for ServiceNow and its peers.
With the exception of Macroeconomics, McDermott said the current situation in the business world is not nearly as bleak as Wall Street thinks today. In fact, even though corporate decision-makers are looking more at spending, many cloud providers are still winning a lot of new deals and growing at a healthy clip as a result.
This was the message of Salesforce CEO Marc Benioff during his company’s earnings update on May 31. Revenue growth slowed slightly throughout the year, but Salesforce is still on track to expand approximately 20% compared to last year. Not bad, Salesforce.
Smaller HubSpot is fine too. It reported a 41% year-over-year revenue increase in Q1 2022. This full-year 2022 outlook calls for approximately 33% sales growth over 2021. For ServiceNow, it grew of 26% subscription revenue in Q1. However, after hearing McDermott’s comments yesterday, some stock analysts think ServiceNow may offer a reduced outlook in its next earnings update on July 27. However, until then, ServiceNow’s current outlook is on 26% subscription growth for the entire year 2022. Stay tuned for more updates in the coming weeks.
I believe that these macroeconomic headwinds and the anxiety they cause to many market participants only indicate an opportunity for long-term investors in high-quality software businesses such as ServiceNow, Salesforce, and HubSpot. All three companies are growing and generating sufficient profitability (as measured by free cash flow). This is a powerful combination that will soon be rewarded by the market. It will take patience, but if these cloud companies continue to expand – even at a slightly slower pace – they look like a great value if you plan to buy and sit with them at least. how many years.
Nicholas Rossolillo and his clients hold positions at Salesforce, Inc. Motley Fool holds positions in and recommends HubSpot, Salesforce, Inc., and ServiceNow, Inc. Motley Fool has a disclosure policy.