ServiceNow's stock gets its only 'sell' call. Here's what's driving it.

By Emily Bary

Guggenheim says monetization of generative AI 'is not happening en masse and is not likely to materialize this year'

Guggenheim analyst John DiFucci is now in a club of one.

With his downgrade of ServiceNow Inc.'s (NOW) stock to sell from neutral over the weekend, he holds the only bearish stance on that software name among Wall Street analysts.

The last time an analyst was bearish on ServiceNow's stock was in early 2023, according to FactSet data. Now, 38 analysts rate the stock at the equivalent of buy, while three others have hold ratings.

DiFucci sees an "unfavorable" setup for ServiceNow through the second half of the year and into 2025. The second-half consensus view for ServiceNow's subscription business "looks like it requires an uptick in business momentum, which doesn't appear likely given the dearth of [generative AI] sales per our field checks," as well as third-party survey work.

Read: Is an AI stock bubble looming? That's the $167 billion question.

Monetization of generative AI "is not happening en masse and is not likely to materialize this year, as management has suggested it would," DiFucci added, based on his conversations with some ServiceNow partners.

He sees "material risk that [ServiceNow] will have to lower top-line subscription guidance for 2024," and he deems 2025 estimates to be "too high" as well. "However, the strong sales-driven culture of [ServiceNow] may delay the admission of reality until it happens (there's always a chance that things can improve ... until there isn't anymore)," DiFucci acknowledged.

ServiceNow's stock was down about 3% in Monday's premarket trading. DiFucci's $640 price target is about 21% below Friday's close of $806.47.

While DiFucci thinks ServiceNow's U.S. federal business is strong, he noted tough comparisons for this segment. The business is "not likely strong enough to grow off the [new annual contract value] it captured" in the second half of 2022 and the first half of 2023.

Meanwhile, the company's state, local and education business is "less mature," and "foreign government efforts won't likely fill the void."

See also: Zscaler's stock has been a laggard this year. Why JPMorgan says it can rise 25%.

-Emily Bary

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07-08-24 0850ET

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