Wall Street found a lot to like in ServiceNow's third-quarter earnings report, but investors are punishing the stock based on one key revenue measure that proved to be a disappointment.
The enterprise software company's guidance for growth in current remaining performance obligations -- the contracted revenue expected to come in over the next 12 months -- will decelerate in the current quarter.
ServiceNow expects growth of 18.5% in current remaining performance obligations in the current fourth quarter, down from the third quarter's 20.5% growth.
Morgan Stanley Research Analyst Adam Wood said the deceleration suggests that "AI adoption is not yet translating into better growth for the overall business."
ServiceNow shares were down more than 26%, to $110.37 after 1 p.m. Eastern time on Thursday, on pace for their largest percentage decline on record, according to Dow Jones Market Data. The stock had already tumbled in after-hours trading on Wednesday after closing down at $150.13 in regular trading.
Wood notes that management cited strong evidence of AI momentum, including raising its annual contract revenue target to $1.7 billion. But current RPO growth had already slowed to 21% in the third quarter from 21.5% in the second quarter, and Wood noted that "this trendline of moderating growth is expected to continue."
"Seemingly strong AI adoption and monetization have not translated to an acceleration for the overall business," Wood said. He has an Overweight rating on the stock and a $165 price target.
Oppenheimer & Co. analyst Brian Schwartz says it raises questions about the durability of ServiceNow's organic growth. ServiceNow's AI momentum "counters a disruption thesis," but "doesn't establish a clear path to organic reacceleration," he said. He has an Outperform rating and a $165 price target on the stock.
Yi Fu Lee, managing director and senior equity research analyst at StoneX Financial, noted some positives from the report, including exceptional large-deal activity, broad-based product demand, and continued operating discipline.
More importantly, ServiceNow raised its full-year AI annual contract value objective for the second time this year, from $1.0 billion at the beginning of the year to $1.5 billion in May to more than $1.7 billion. Lee reiterated the stock's Buy rating, but lowered the price target to $150 from $165 previously.
For the third quarter ended in September, ServiceNow reported adjusted earnings of $1 a share, missing Wall Street's expectation for $1.02 a share. Revenue of $4.11 billion was up 20.5% from last year's third quarter and above expectations.
Subscription revenue for the quarter rose 21% from a year ago, to a higher-than-expected $3.988 billion. ServiceNow said fourth-quarter subscription revenue is expected to rise 22% to 23%, while full year subscription revenue is expected to rise more than 22%.
The stock is down 27% this year and down 40% over the past 12 months.
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