ServiceNow shares tumbled 27% after its third-quarter report renewed fears that AI could disrupt its business. Revenue still grew more than 20% and the company raised guidance, which leads Motley Fool analyst Geoffrey Seiler to say the drop appears to be an extreme overreaction.
ServiceNow shares tumbled 27% after the company's third-quarter earnings report renewed fears that artificial intelligence could disrupt its business. The stock is now down 31% on the year.
Smaller beat than investors are accustomed to
The panic centers on a smaller-than-typical earnings beat and less robust guidance than expected, according to Seiler. Even so, he describes the results as solid in a vacuum.
Overall revenue grew 20.5% to $4.11 billion, while adjusted earnings per share rose 5% to $1. Analysts had looked for EPS of $1.02 on revenue of $4.1 billion, as compiled by LSEG.
Subscription revenue climbed 21% to $3.99 billion, or 20.5% on a constant currency basis. That topped the 20% constant currency growth the company had guided for, but ServiceNow has a history of larger beats.
AI remains a driver
Investors worry about AI's impact, yet AI also drives the business. AI annual contract value rose 65% year over year, and ServiceNow raised its year-end target to $1.7 billion from $1.5 billion.
The company also expanded its partnership with OpenAI. OpenAI will incorporate more of its models and AI agents into ServiceNow products and connect ServiceNow workflows with ChatGPT.
Remaining performance obligations increased 22.5% to $29.7 billion. Current RPO rose 21% to $13.65 billion.
Guidance moves up slightly
For the full year, ServiceNow raised its subscription revenue guidance to a range of $15.78 billion and $15.79 billion, up slightly from the prior $15.76 billion and $15.78 billion. For the fourth quarter, it forecast subscription revenue growth of 22.5% to 23%.
Seiler argues the stock now trades at a forward price-to-earnings ratio of just above 22 times. In his view, the company is well positioned to be an AI winner.
Source: The Motley Fool
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