Analysts bullish on ServiceNow's GenAI plans; shares fall despite a beat-and-raise quarter

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Analysts bullish on ServiceNow's GenAI plans; shares fall despite a beat-and-raise quarter
Credit: © Reuters.

ServiceNow (NYSE: NOW ) fell over 3% in pre-open Thursday trading despite the company reporting better-than-expected Q2 results and raising its full-year forecast.

The company reported adjusted EPS of $2.37 on revenue of $2.15 billion, topping the consensus for earnings of $2.05 per share on revenue of $2.13B. Subscription revenue rose 25% year-over-year to $2.08B.

“ServiceNow results were supercharged by unprecedented demand for our organic innovation,” said ServiceNow chairman and CEO Bill McDermott.

“We’re in a powerful new ‘AI world,’ where imagination is the only limit. ServiceNow is already seeing our own significant productivity increases with the generative AI solutions we’re releasing to the market, which will rapidly accelerate breakthrough innovation for our customers.”

The remaining performance obligations were reported at $14.2B while the current remaining performance obligations (cRPO) was reported at $7.2B, both ahead of market consensus.

For this quarter, the company sees subscription revenue coming in at $2.19-2.2B, ahead of the consensus for earnings of $2.15B. As a result, the company hiked its full-year subscription revenue forecast to $8.59B, up from the prior $8.505B and the consensus of $8.51B.

cRPO is seen rising 25.5% YoY in Q3 after growing 25% in the previous quarter.

During the earnings call, the management announced plans to launch new Generative AI capabilities this fall via Pro+ and Enterprise+ SKUs. ServiceNow's Plus SKUs are expected to have "at least a 60%" list price increase above Pro, the company said.

Mizuho analysts said the market witnessed another good execution quarter by ServiceNow. They stay Buy-rated.

"We believe NOW remains very well positioned for high growth over the next few years, fueled by ongoing demand for workflow automation, strong cross-sell opportunities, and AI monetization," the analysts wrote in a note.

Needham & Company analysts said that the company's GenAI commentary on the call stole the show.

"Investors have hotly debated ServiceNow's ability to monetize GenAI, with concerns that productivity gains will inherently counteract the company's seat-based pricing model. However over the last 3 months, management has consistently messaged that Pro SKUs have historically captured a 25% ASP uplift, while seat count has grown 10%. We have conviction GenAI can begin to benefit ServiceNow's financial model in 2HCY24 as adoption scales," they said.

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