Buy the Dip or Stay Away? Canaccord Weighs In on ServiceNow (NOW) Stock

ServiceNow (NYSE:NOW) stock is back in decline, giving back recent gains and dropping 18% in Thursday’s trading. NOW has been a victim of what has been termed the SaaSocalypse, the fear of AI agents making software companies obsolete. To wit, shares have crashed by 55% over the past 6 months.

The latest drop came in the wake of the company’s Q1 results, which actually hit plenty of right notes – the company beat on revenue, delivered in line results on profit and, guided Q2 subscription revenue above Street forecasts.

So, what exactly caused the post-earnings selloff? Canaccord analyst David Hynes puts it down to the company providing “just enough rope” to reinforce the bear case. The combination of factors included an approximately 75 basis point drag on subscription revenue tied to several large on-premise deals in the Middle East being delayed due to the ongoing conflict, a modest Q1 current remaining performance obligation (cRPO) beat, Q2 cRPO guidance that points to a “meaningful deceleration,” and a full-year outlook that, excluding the newly-acquired Armis’ contribution, was maintained rather than increased.

“In a calmer market, that’s not particularly newsworthy,” said Hynes. “In this one, it’s a sell-first-ask-later setup.”

For Hynes, the “punitive reaction” is not merited, and once you look through the geopolitical disruptions and cRPO optics, the results were generally solid. Subscription revenue exceeded the guide by roughly 100 basis points excluding the Middle East impact, and cRPO also came in about 100 basis points ahead on a reported basis, albeit below the company’s typical beat levels and without the usual 75 to 150 basis points boost from early renewals. The FCF margin guidance was raised by around 100 basis points, while revenue and operating margin were maintained on an organic basis despite the Middle East headwind.

Hynes also points out that the “step-down” nature of the Q2 cRPO outlook largely reflects timing and seasonal factors, including caution on Middle East deals, no contribution from early renewals, and typical federal seasonality, rather than “underlying demand weakness.” More importantly, trends remain strong, with Now Assist tracking well ahead of expectations and projected to generate about $1.5 billion in net new ACV this year (up from the prior $1 billion+), alongside accelerating growth in new customer wins and continued strength across core and emerging products.

“Zooming out,” says Hynes, “this is still one of the best-positioned platforms in software,” with management highlighting a handful of “durable growth vectors that together define the longer-term thesis.” These include continued strength in its IT platform, where growing AI-driven workloads push “ticket volume higher by an order of magnitude,” expansion into AI-focused security through recent acquisitions, a push into next-generation CRM, early traction in its EmployeeWorks offering, and its Workflow Data Fabric being the “connective tissue that gives AI agents enterprise context.”

“Bottom line,” Hynes summed up, “a durable 20%+ growth business compounding at 35%+ FCF margins, now trading at ~15x EV/FCF, is, in our view, ridiculously cheap.”

It’s a “NOW-brainer,” then, with Hynes assigning the stock a Buy rating, although his price target goes from $200 to $145. Nevertheless, the new figure still suggests shares will climb 71% higher in the months ahead. (To watch Hynes’ track record, click here)

Among Hynes’ colleagues, 32 others join him in the bull camp, while an additional 4 Holds and 1 Sell can’t detract from a Strong Buy consensus rating. Going by the $149.11 average price target, a year from now, shares will be changing hands for a ~76% premium. (See NOW stock forecast)

Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.