ServiceNow Tumbles Over 20% As Sell-Side Reacts To Earnings And Guidance

Following its earnings report, research firms MKM and Mizuho both issued notes regarding ServiceNow Inc (NYSE: NOW). While ServiceNow did report better-than-expected quarterly results, the revenue forecast was weak.

MKM and Mizuho both downgraded the stock to Neutral, with a price target of $60 and $65, respectively.

Mizuho's Perspective: Downgrade To Neutral, PT Of $65

According to the Mizuho note, two misses within a single year causes concern and therefore justifies a downgraded rating and the significant $25 price target cut. However, Mizuho's analysts still "view ServiceNow as one of the leading SaaS players." In light of the misses and the potential for further macro-related concerns – as gathered from management team comments – the research firm challenges management "to prove its ability to sustain high levels of growth over the next few years."

Related Link: Benzinga's Top Downgrades For January 28

Mizuho highlighted two key points justifying the analysts ratings and cut:

• Increased Caution Regarding Premium Valuation: "Management missing its billings forecast […] could be understandable if it was the only miss in the year," the firm commented. "We find two misses in one year concerning," the report elaborated. Furthermore, sales reps' missed quotas and "large customer's preference to cut payment terms in half" also increase Mizuho's apprehension.
• Billing Missed: While Q4 results came in above expectations, the billings numbers did not. The shortfall came in at $366 multimillion, while the consensus estimate was $374 multimillion.

MKM's Report: Downgrade To Neutral, PT Of $60

Similarly to Mizuho's analysis, MKM became more cautious toward the issue. Citing a "solid report," MKM highlighted the positives in ServiceNow's Q4 report, "NOW beat revenue, margins, EPS, and cash flows in 4Q15 […] the stock is at a significant premium even to its peer group."

However, the firm also downgraded ServiceNow from Buy to Neutral based on a few compelling data points:

• Slight Billings Miss: Just as Mizuho noted, MKM focused in on the billings miss, but with a more positive spin, "NOW made a $5 million forecasting error when setting guidance that was not discovered until late in 4Q. Without this, billings would have been within the guidance range."
• Macro Concerns: Despite the two misses Mizuho emphasized, MKM reaffirmed, "NOW has beat OM percentage solidly in each of the past three quarters, and 2016 guidance of 12 percent […] would be in-line with Salesforce.com (CRM, Buy, $86 PT) with 6x more revenue." However, MKM noted, "In our view, this is unlikely to be sustained given decelerating billings and the current macroeconomic environment."

ServiceNow was recently seen trading down 20.28 percent at $60.13.

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