ServiceNow is the IBD Stock of the Day as the software maker shows resilience during equity market volatility. Amid the rise of generative artificial intelligence, analysts see both potential upside and risks for NOW stock.
On the stock market today, NOW stock dropped 1.2% to close at 559.60. ServiceNow stock has gained 45% in 2023.
Shares recently pulled back to their 50-day moving average. On Monday, NOW moved above an entry point of 566.07, which was its high on Aug. 10.
Many investors have focused on AI stocks owing to startup OpenAI's launch of ChatGPT. Many companies are scrambling to launch generative AI pilot programs.
Some investors initially viewed generative AI as a potential problem for ServiceNow. Under ServiceNow's subscription-based business model, it charges companies based on users, or "seats," that utilize its software.
NOW Stock: Business Model Threat From AI?
One worry for NOW stock and other software makers is that companies will need fewer people as generative AI improves productivity. That potentially means less per-seat software licenses.
However, ServiceNow has focused on putting generative AI into its software platform that also will create revenue-generating opportunities, analysts say. ServiceNow in September is expected to release its "Vancouver" update to its software platform.
"While the topic of generative AI is the buzzword for every software company today, the top question that remains for most vendors is how they will ultimately monetize it," Evercore ISI analyst Kirk Materne said in a note Tuesday to clients.
He added: "A consistent point of feedback we've heard from partners that we think is worth sharing, is that ServiceNow is very good at capturing incremental pricing as a result of the value they deliver in their platform enhancements and updates. That is, there is a built-in price increase in every release, with Vancouver in the fall expected to be the tipping point in terms of the start of gen AI monetization."
Generative AI Tools
The NOW stock analyst noted that ServiceNow has partnered with Microsoft to make ServiceNow apps work on OpenAI's large language models, or LLMs, in Microsoft's Azure cloud computing platform.
LLMs lie at the center of ChatGPT and other generative AI systems. The more data an LLM is trained upon, the more powerful its capabilities can become.
Meanwhile, LLMs understand the way that humans write and speak. Users can interact with the AI systems without the need for understanding or writing algorithms, analysts say. The models process "prompts," such as an internet search query, that describe what a user wants to get.
Evercore's Materne also said ServiceNow is building industry-specific LLMs that utilize a customers own data to build generative AI apps. Generative AI technologies create text, images, video and computer programming code on their own. Generative AI technology is quickly finding applications in marketing, advertising, drug development, video gaming, customer support and digital art.
Outlook Disappoints?
ServiceNow recently announced a partnership with Nvidia and Accenture to accelerate adoption of artificial intelligence software in the corporate market.
Meanwhile, ServiceNow reported June-quarter earnings that beat analyst estimates while revenue edged by views. Its outlook for a key financial metric — current remaining performance obligations, or CRPO — spooked some NOW stock investors.
In the June quarter, CRPO bookings were $7.2 billion, up 25% from a year earlier. The software maker had forecast 23% growth.
For the current September quarter, ServiceNow forecast CRPO growth of 21.5%, below estimates.
For fiscal 2024, Wall Street analysts predict 23% earnings growth to $12.23 a share, and revenue climbing 22% to $10.85 billion. ServiceNow's projected 2024 growth is about double that of Salesforce, also a big-cap, software-as-a-service company.
NOW Stock: Technical Ratings
The company's software tracks and manages services provided by information-technology departments. Also, its self-service tech portal enables company employees to access administrative and workflow tools.
Further, ServiceNow has expanded from its core business into software for human resources, customer service management and security.
NOW stock owns a Relative Strength Rating of 91 out of a best-possible 99, according to IBD Stock Checkup.
ServiceNow stock also has an Accumulation/Distribution Rating of C. That rating analyzes price and volume changes in a stock over the past 13 weeks of trading.
The rating, on an A+ to E scale, measures institutional buying and selling in a stock.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.
