ServiceNow Stock Tests Annual Low as AI Push Confronts Government Spending Cuts

ServiceNow shares fall 30% in 2024 as government spending cuts and sector valuation pressures overshadow 20%+ quarterly revenue growth. Analysts cut targets but remain bullish.

ServiceNow shares touched a new low for the year this week, extending a painful 2024 that has seen the stock shed roughly 30 percent of its value since January. This decline persists despite the company reporting three consecutive quarters of revenue growth exceeding 20 percent, highlighting a stark disconnect between operational performance and market sentiment.

The primary headwinds are twofold. A significant slowdown in U.S. government spending is biting into a formerly robust segment. The newly established Department of Government Efficiency (DOGE) has aggressively pared back federal software contracts in early 2024, a stark contrast to the 30 percent growth ServiceNow enjoyed in this area last year. Concurrently, the broader software sector is undergoing a valuation correction, amplifying the pressure.

Wall Street analysts have responded to this tougher environment by slashing price targets, even as they maintain a generally bullish long-term stance. In recent days, several firms have revised their models downward. Goldman Sachs cut its target to $188 from $216. Stifel reduced its expectation to $135 from $180, explicitly citing lower government expenditures, while FBN Securities adjusted its target down to $160 from $220. Notably, despite these reductions, 37 out of 43 covering analysts continue to recommend buying the stock.

Institutional investors appear to share this tempered optimism. Prominent portfolio managers, including Stephanie Link, have been adding to positions at these lower levels. Value investors are also holding firm, with BNP Paribas noting their confidence in ServiceNow's long-term market position within enterprise software remains intact.

Amid the market turbulence, ServiceNow is aggressively advancing its artificial intelligence strategy. The company announced a multi-year partnership with DXC Technology this week, designating the IT services firm as the first major test client for its new autonomous "Agentic AI" capabilities. DXC will implement the tools internally in areas like IT service management before a broader market rollout, aiming to automate business processes with minimal manual intervention.

This initiative supports management's ambitious target for its AI business to surpass $1 billion in annual contract value this year. Its generative AI product, Now Assist, is already a key contributor with an annual contract value exceeding $600 million. However, the pricing strategy presents its own challenge. Access to Now Assist requires an expensive upgrade to a "Pro Plus" tier, a cost barrier causing some IT buyers to consider in-house development alternatives.

All eyes now turn to the company's first-quarter earnings report, scheduled for release after the U.S. market closes on April 22. The analyst consensus calls for total revenue of $3.75 billion and adjusted earnings of $0.97 per share. This report will provide the first concrete financial data to assess the impact of Washington's spending cuts. Investors will be scrutinizing whether nascent AI revenue streams, bolstered by partnerships like the one with DXC, can offset the emerging weakness in government contracts.