ServiceNow’s Stock Sees Fair Value Estimate Cut Despite Good Quarterly Earnings

On a constant-currency basis, ServiceNow (NOW) reported upside relative to guidance for its third quarter. Currency headwinds continued to worsen, which pushed reported results below our expectations. Guidance was also below our model, although once again currency is the culprit. While we view the quarter as good overall—and very good in the current environment—we have lowered our near-term estimates to account for reported results and guidance and are therefore reducing our fair value estimate to $640 per share from $675. Despite this, we view the stock as attractive. We continue to favor ServiceNow as one of our top picks for its long-term organic-driven growth as it leverages its strength in workflow automation to bring its existing customers more deeply into IT and more broadly with human resources and customer service-specific products, as well as its continued push into industry segment-specialized versions.

Total revenue grew 21% year over year to $1.831 billion as reported, compared with FactSet consensus of $1.850 billion. Excluding a 650-basis-point headwind from currency, including $26 million in incremental headwinds not contemplated in guidance, revenue would have grown 27.5% and would have exceeded the top end of guidance by $16 million. Performance was evenly spread across segments, products, and geographies, with notable strength in U.S. federal. Subscription revenue of $1.742 billion as reported grew 22% year over year, including a 650-basis-point headwind from currency. Strength in large deals continues, with 69 deals in excess of $1 million in annual contract value. ServiceNow boasts 1,530 customers generating in excess of $1 million in ACV, which usually implies multiple solutions are involved. To that end, the firm had five large deals with new customers that were all led by different products. Deal sizes are rising as traction continues in large multiproduct deals that support customer service and HR.