Shares of enterprise software company ServiceNow slipped Monday after Guggenheim analysts downgraded the stock to a sell rating. Shares of other enterprise software firms appear to be falling with ServiceNow stock, as the analysts' downgrade came with a warning about generative AI revenue.
Guggenheim analyst John DiFucci flipped his outlook on ServiceNow stock from neutral to sell in a client note dated July 7. ServiceNow reports second quarter earnings on July 24. DiFucci expects the quarterly results will "be fine" but there is a "material risk that (ServiceNow) will have to lower top-line subscription guidance for 2024," he wrote.
Guggenheim introduced a price target of 640 for ServiceNow stock, implying 20.6% downside from Friday's closing price. The new report cites field checks that found a "dearth of GenAI sales," according to DiFucci.
ServiceNow "seems to be expecting an uptick in GenAI business in the (second half of 2024), but our field work indicates this is not likely until 2025, if ever," DiFucci wrote.
On the stock market today, ServiceNow stock lost 5% to close at 765.82.
Watching AI Momentum For Enterprise Stocks
ServiceNow's subscription software tracks and manages services provided by information-technology departments, among other functions. The company offers several AI tools aimed at helping companies manage and improve their regular tasks.
ServiceNow stock has gained 8.5% so far this year but 39% over the past 12 months. The stock gained more than 20% in June.
Analysts are largely positive on the stock. Guggenheim represents the only sell call for ServiceNow, according to FactSet. There are 38 analysts that consider the stock a buy. Three other analysts have neutral hold ratings.
The Guggenheim report comes amid broader debate about how much generative AI will benefit makers of software for businesses. Many companies are still experimenting with the technology, leaving software companies to wait for broader adoption. Monness Crespi Hardt analyst Brian White said in a client note Friday that generative AI has been a "revenue mirage" for most enterprise software companies.
The downbeat view from Guggenheim's note may be hitting other enterprise software stocks. Salesforce, Datadog, Workday and Palo Alto Networks were all down in Monday trading. The broader iShares Expanded Tech-Software ETF, which holds shares of over 100 enterprise software players, lost 1% in Monday trading.
ServiceNow Stock: Consolidation Pattern
Prior to Monday's slide, ServiceNow stock was approaching an 815.32 potential buy point from a consolidation pattern, according to MarketSurge pattern recognition.
Still, shares are trading well above ServiceNow stock's 21-day and 50-day moving averages.
ServiceNow stock is on the IBD 50 stock list. It is also on IBD's Tech Leaders and Big Cap 20 stock lists.
