At the end of October, ServiceNow reported another quarter of impressive financial results, with forecasts and guidance being exceeded across most major metrics. On the same day, the company also announced a five-for-one stock split – often the sign of a company on the up. By every major metric, the wind appears to be firmly in ServiceNow’s sails.
And yet, for two consecutive quarters, we’ve now seen ServiceNow’s stock (known as ‘NOW’) take a noticeable plunge after the release of quarterly earnings figures. So what’s going on?
Another Quarter of Growth for ServiceNow…
Back in August, we reported that ServiceNow’s stock had taken a curious downturn after the release of quarterly financial data. Q2 financial results were released on July 23, and NOW quickly jumped from $956 to $996 over the following 24 hours. But barely two weeks later, that situation had quickly reversed (and then some), with the stock dropping again to a floor of $850 on August 14.
Today, the situation for NOW looks strangely similar. As we reported last week, Q3 earnings were similarly impressive, with revenue forecasts again being exceeded across most major metrics. The figures were released on October 29, with the headline stock rising again over the next 24 hours, from $911 to $934.
By November 6, barely a week later, that number had dropped again to $858. In the days since, it’s settled at that rate or thereabouts.
Crucially, this isn’t just a response to broader market movements. When we compare NOW’s performance against the S&P 500 (the best objective measure of the average stock market performance), NOW’s performance looks noticeably rough. Over the last month, the S&P 500 has risen by 1.24% against NOW’s loss of over 8%. The same picture emerges when we consider a 12-month period: Since November 2024, the S&P 500 has risen by 12.57%, compared with losses from NOW of over 18%.
To the casual observer, therefore, it looks like ServiceNow is failing to translate its substantial financial and commercial success into shareholder value.
What’s a Stock Split and Why Does It Matter?
There’s also another matter complicating the stock situation. At the same time as its Q3 earnings were released, ServiceNow also announced a five-for-one stock split.
To understand this in more detail, it’s helpful to recap what a stock split is and why organizations do it. It involves simultaneously increasing the number of stocks while decreasing the amount that each stock is worth. This essentially brings down the headline rate of the stock without changing the fundamental value of shareholders’ assets.
If, for example, a shareholder held a single stock worth $100, a five-for-one stock split would turn that into five stocks each worth $20. The total value is the same, but the price of an individual stock is now a fifth of its original value.
Stock splits, therefore, bring down the headline rate and lower the barrier to entry for investors. It tends to happen after prices have risen consistently over a sustained period, as higher headline rates can put off smaller investors. Generally, these announcements are a cause for celebration.
This adds a curious dimension to the current ServiceNow stock conundrum, since organizations generally announce stock splits after a sustained rise in value. But the picture for NOW through 2025 has been much more mixed.
So, What’s Really Going On With NOW?
Most analysts agree that the fundamentals for ServiceNow remain strong. After all, you can’t argue with the financial figures. But after two successive quarters of impressive results and disappointing stock performance, this is in danger of looking like a trend.
There are several potential reasons why NOW is having a hard time, but there’s no smoking gun here. First, investors are becoming increasingly wary of AI-exposed stocks, fearing that a lack of tangible ROI from AI products will lead to a significant correction in the months ahead. Given ServiceNow’s extensive AI investment, this could well be a contributing factor.
At the same time, the long US government shutdown also seems to have had an impact here. ServiceNow has a significant number of contracts with the US Federal Government, meaning shutdowns have a noticeable effect on the company’s earnings figures. While the shutdown has now lifted, it is expected to have a noticeable impact on Q4 earnings figures.
To add to that, some analysts have been speculating for some time about whether NOW may be overpriced – despite the impressive financial results. This is because the company’s price-to-earnings ratio is noticeably higher than similar companies elsewhere in the market, as Simply Wall Street explains:
“ServiceNow currently trades at a P/E of 116.2x, which stands out when compared to the industry average of 33.3x and the peer group average of 63.1x. On the surface, this premium is substantial. However, high-quality, fast-growing businesses frequently command larger multiples, reflecting higher anticipated profits and stability.”
Simply Wall Street
This is important because the price-to-earnings ratio is often used as a proxy for how fairly valued a stock is.
However, it’s important to note that this isn’t the consensus view among analysts. Most agree that the last few months have been an anomaly and that ServiceNow’s impressive financial results will lead to significant stock growth over the next few quarters. Currently, analysts have a consensus price target of $1,142.59, which is essentially the average forecast for NOW’s value in a year’s time (notwithstanding the stock split).
Nonetheless, views remain split, and this consensus is far from unanimous. For ServiceNow’s part, the stock split announcement suggests the leadership remains optimistic about NOW’s future, despite its mixed performance over the last few months.
Final Thoughts
So, in summary: Financial results and the market consensus lean very much in NOW’s favor. But recent performance and a minority of analysts suggest the stock is overvalued and that recent data represents a correction. Only time will tell which analysis is correct.