Software-as-a-service (SaaS) companies are having one of their single worst days in the stock market in decades. The sell-off began after Salesforce (NYSE: CRM) disappointed Wall Street with Q1 earnings that missed the mark. In response, industry peer ServiceNow (NYSE: NOW) is also getting punished, losing 10% on the day and erasing most of the gains it saw following its Q1 earnings report.
ServiceNow stock dipped below the psychologically important $700 level to $658 in early trading, indicating that the bears have taken control for now. After hovering as high as $815 in the past 52 weeks, NOW stock is nearly 25% below the high end of its range.
Before long, it might become apparent that the knee-jerk reaction to Salesforce’s earnings was an overreaction. Nevertheless, here are three reasons why ServiceNow stock could be plunging today.
1.) Down in Sympathy With Salesforce
First and foremost, ServiceNow stock is falling in sympathy with Salesforce. With Q1 revenue of $9.13 billion, up 11% year-over-year, Salesforce is an industry leader. However, its top-line performance missed consensus estimates, something it hasn’t done since 2006. That shock sent the stock and its peers, including ServiceNow, reeling.
Worse, Salesforce’s revenue and EPS outlook for Q2 was below Wall Street’s expectations, which is a no-no in the current market environment in which investors are obsessed with guidance. The company is calling for Q2 revenue in the range of $9.2 billion and $9.25 billion compared with Street estimates of $9.4 billion. Salesforce also predicts Q2 EPS of between $2.34 and $2.36 vs. consensus estimates of $2.40 per share.
However, something for NOW investors to remember is that software isn’t dead. ServiceNow had a standout Q1, and its fundamentals are intact. The company lifted the midpoint of its full-year subscription revenue forecast. Its Q1 total revenue ballooned by 24% year-over-year to $2.6 billion. While investors might be spooked that a potential slowdown at Salesforce is indicative of the market, there is no apparent slowdown at ServiceNow.
2.) AI Anxiety
Oppenheimer’s Brian Schwartz told CNBC today that there’s been less hiring in the software space, as a result of which there’s been less investment too, noting that “investments in AI are crowding out investments in software.”
While on the surface ServiceNow might not appear to be an artificial intelligence play, the company has incorporated the cutting-edge technology into its software and considers itself a first-mover in this field. ServiceNow’s GenAI solution is called Now Assist, the most recent release of which was the Now Platform Washington, D.C., which according to the company is designed to “boost intelligent automation and deliver fast time to value, critical elements of a business’s digital transformation roadmap.”
It’s also key to remember that AI innovation wasn’t at this level just last year at this time. So companies are having to scramble to keep pace with demand. ServiceNow is also a partner of AI sensation Nvidia (Nasdaq: NVDA) and is the self-proclaimed maiden CRM platform to harness the chipmaker’s technology for its GenAI solutions. Investors have tremendous expectations around anything AI related, and ServiceNow has asserted itself into this camp. That comes with highs and lows that are sure to continue playing out over the near term.
3.) Profit Taking
Finally, investors may have simply decided it was time to take some profits off the table on ServiceNow. NOW shares have increased 20% over the last 12-month period. Additionally, the stock experienced a double-digit percentage increase between its Q1 earnings report and its May high above the $780 level. Therefore, it stands to reason that profit taking could be a reason for the pullback in ServiceNow stock today even as others might decide it’s time to buy the dip.
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