Guggenheim analysts have downgraded ServiceNow (NYSE:NOW) to Sell from Neutral, and set a price target of $640.
While the investment firm expects NOW’s 2Q24 results to be satisfactory, they see risks in the second half of 2024, particularly concerning consensus Subscription expectations.
Analysts also note that the stock is currently trading at a high valuation of 15x EV/NTM likely recurring revenue, which presents significant downside risk.
“NOW seems to be expecting an uptick in GenAI business in the 2H, but our field work indicates this is not likely until 2025, if ever,” analysts said in a note.
“Partner checks were generally positive for 2Q, but not as positive as they usually are. Several partners expressed concern about 2H24, especially since GenAI monetization is not happening en masse and is not likely to materialize this year, as management has suggested it would.”
Although the company’s US Federal business for ServiceNow remains robust, it is unlikely to provide the same boost in New Annual Contract Value (ACV) seen from the second half of 2022 through the first half of 2023.
Moreover, the less mature State, Local, and Education (SLED) markets and foreign government efforts are not expected to compensate for this gap.
Based on their fieldwork and analysis of the IT spending environment, along with the anticipated need for increased business momentum in the second half of 2024, analysts believe there is “a material risk that NOW will have to lower top-line subscription guidance for 2024.”