**Guggenheim Downgrades ServiceNow (NOW) to Sell: Is a Market Correction Looming?**
Guggenheim analysts have issued a downgrade for ServiceNow (NYSE: NOW), shifting their rating from Neutral to Sell, and have set a price target of $640.
While the investment firm anticipates satisfactory results for ServiceNow's Q2 2024, they express concerns about the second half of 2024, particularly around consensus Subscription expectations.
Analysts highlight that the current stock valuation, trading at 15x EV/NTM likely recurring revenue, poses significant downside risk.
“ServiceNow anticipates an uptick in GenAI business in the second half, but our field research suggests this may not occur until 2025, if at all,” analysts noted in their report.
“Our partner checks were generally positive for Q2, but not as favorable as usual. Several partners voiced concerns about the second half of 2024, especially as GenAI monetization is not happening at scale and is unlikely to materialize this year, contrary to management's suggestions.”
Although ServiceNow's US Federal business remains strong, it is unlikely to provide the same boost in New Annual Contract Value (ACV) seen from the second half of 2022 through the first half of 2023.
Moreover, less mature State, Local, and Education (SLED) markets and foreign government efforts are not expected to fill this gap.
Based on their fieldwork and analysis of the IT spending environment, along with the anticipated need for increased business momentum in the second half of 2024, analysts believe there is “a material risk that ServiceNow will have to lower top-line subscription guidance for 2024.”
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### Analysis: What This Means for You and Your Finances
**Understanding the Downgrade:**
Guggenheim's downgrade of ServiceNow to a "Sell" rating means the analysts believe the stock is likely to decrease in value. They have set a price target of $640, which is below the current trading price. This suggests that they see potential risks and challenges for ServiceNow that could negatively impact its stock performance.
**Key Concerns:**
1. **High Valuation:** ServiceNow is currently valued at 15 times its expected recurring revenue, which analysts believe is too high and poses a risk of significant price drops.
2. **GenAI Business Delays:** The anticipated growth in ServiceNow's GenAI business is likely to be delayed until 2025, contradicting the company's more optimistic timeline.
3. **Mixed Partner Feedback:** While partner feedback for Q2 is positive, it's not as strong as usual. Concerns are growing about the second half of 2024, particularly regarding GenAI monetization.
4. **US Federal Business:** Although strong, it won't likely match the ACV growth seen in past periods.
5. **SLED Markets:** Less mature markets and foreign government efforts are not expected to compensate for the gaps in revenue.
**Impact on Subscription Guidance:**
Due to these factors, analysts believe there is a significant risk that ServiceNow will need to lower its subscription revenue guidance for 2024. This could lead to a decrease in stock price as investors adjust their expectations.
**What Should You Do?**
For current investors in ServiceNow, it may be wise to reassess your position in light of this downgrade. If you're considering investing, be cautious and consider the potential risks highlighted by Guggenheim. Diversifying your portfolio and keeping an eye on how ServiceNow addresses these challenges could be a prudent strategy.