Key Points
Subscription revenue and RPO growth deceleration led to ServiceNow's stock selling off.
Yet, the software-as-a-service company is still performing well, and the stock is cheap.
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The market has one clear message for software-as-a-service (SaaS) stocks: Accelerate revenue growth or get punished. That's a tough predicament to be in when many of their customers are trying to understand what artificial intelligence (AI) is going to mean for their own businesses and determine what their roadmaps should look like.
The latest victim of the market shooting first and asking questions later with SaaS stocks is ServiceNow (NYSE: NOW). The stock plunged after announcing its Q1 results, and its shares are down around 45% year to date, as of this writing.
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For a company that is the backbone of its customers' internal software plumbing, this sell-off looks like a gift -- at least over the long term.
Subscription revenue and RPO growth deceleration sink the stock
Based on its price reaction, you might assume that ServiceNow missed expectations or lowered guidance, but that was not the case. For Q1, revenue climbed 22% year over year to $3.77 billion, while adjusted earnings per share (EPS) rose 20% to $0.97. That topped the analyst consensus, which was looking for EPS of $0.96 on revenue of $3.74 billion, as compiled by the LSEG, despite the company saying a few large on-premise deals failed to close in the Middle East due to the war.
Subscription revenue jumped 22% year over year to $3.67 billion, while professional services revenue increased 18.5% to $99 million. While subscription revenue did accelerate, on a constant currency basis, it ticked down slightly from 19.5% growth in Q4 to 19% growth in Q1.
Another important SaaS metric is remaining performance obligations (RPO), which is deferred revenue plus backlog growth. This measure can be an indicator of future revenue growth, and thus tends to be closely scrutinized. In the quarter, ServiceNow saw its RPO increase by 23.5% to $27.3 billion, while current RPO (cRPO) rose by 21% to $12.45 billion. That was a deceleration from RPO growth of 26.5% and cRPO growth of 25% in Q4.
Looking ahead, the company expects its Q2 subscription revenue to grow 22.5% to a range of $3.815 billion to $3.82 billion. It anticipates cRPO to increase by 19%. For the full year, it raised its subscription revenue guidance to a range of $15.735 billion and $15.775 billion, representing growth of 22% to 22.5%. That was up from prior revenue guidance of between $15.53 billion and $15.57 billion, representing growth of 20.5% to 21%. However, the recent acquisition of cyber security business Armis should add 125 basis points of growth.
Image source: The Motley Fool.
Time to buy the dip
Investors clearly need SaaS companies to prove the AI disruption thesis wrong this instant, or the stocks will take a hit. ServiceNow's latestquarter and guidance weren't bad, but investors want to see growth accelerate, given the promises of AI and its recent acquisitions.
At a forward price-to-sales (P/S) multiple of 5.5 and a forward P/E of 20, the stock is cheap for a high-gross-margin company growing its revenue at a 20% clip. Meanwhile, I think the company has a big opportunity with AI Control Tower, an agentic AI orchestration platform.
With investors clearly impatient, I'd take advantage of this dip and buy shares of one of the most deeply embedded and fast-growing SaaS companies out there while it remains in the bargain bin.
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Geoffrey Seiler has positions in ServiceNow. The Motley Fool has positions in and recommends ServiceNow. The Motley Fool recommends London Stock Exchange Group Plc. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
