So, is it the Next Big Thing, or what?
It's hard to read any kind of business story without coming across a reference to artificial intelligence and how companies are all looking to get their hands on it ASAP.
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Early this year the consulting and accounting firm PWC said in a report that in 2024 "artificial intelligence (AI) will start to fundamentally change how business gets done.
"It will impact how companies grow revenue, conduct everyday operations, engage customers and employees, build new business models, and more," the firm said.
Almost three-quarters (73%) of U.S. companies have already adopted AI in at least some areas of their business, PwC said. Generative AI, which produces new material — text, images, videos, and other data — out of existing data using generative models leads the way, the consulting firm said.
The U.S. Census Bureau's Business Trends and Outlook Survey found that while companies' use of AI tools to produce goods and services has increased over the past year, it’s still rather small since many businesses haven’t yet seen a need for it.
Amir Goldberg, an associate professor of organizational behavior at Stanford University Graduate School of Business, said in an interview last year that “for certain things where the optimization problem is well defined, like simple aspects of supply-chain management, adopting AI is a no-brainer because it’s proven and we know how to use it.
“But on other things, like managing relationships with your employees, the opportunities and the risks both appear colossal.,” he said. “It’s not a binary decision: Do I do AI or do I not do AI? It’s: How do I integrate AI into my operations?”
Cloud-computing-platform company ServiceNow (NOW) has made no secret about the importance of AI.
ServiceNow's CEO: 'We're into a new frontier'
"We are in a race to put AI to work for people, and that's a race ServiceNow intends to win for our customers," Chairman and Chief Executive Bill McDermott told analysts in April. "And we're into a new frontier now where GenAI has opened up the eyes of the customer to say, 'there might be a different way of doing this.'"
ServiceNow posted a first-quarter profit $1.67 a share, more than twice the 73 cents a share of the year-earlier period. Adjusted earnings came to $3.41 per share, beating Wall Street’s call for $3.15 per share.
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Revenue totaled $2.6 billion, up 24% from the year-earlier period, while the consensus forecast called for $2.59 billion in sales. First-quarter subscription revenue came to $2.52 billion, up 25% and $10 million above the analyst consensus.
"I do see the budgets not only going up in IT, but also just see genAI becoming more of a business imperative," McDermott said.
Guggenheim turns bearish on ServiceNow
However, Guggenheim analyst John Difucci recently downgraded ServiceNow to sell from neutral with a $640 price target. (The stock finished regular trading on July 8 off 5% at $766.20.)
While the company's second-quarter report this month "will be fine," the second half of 2024 presents risk to consensus subscription estimates, which in turn presents "material risk in the stock," the analyst told investors in a research note. He called the stock's valuation "rich."
Difucci said that while ServiceNow seems to be expecting an uptick in generative artificial intelligence business in the second half of 2024, the investment firm's field work indicates this is not likely until 2025, "if ever."
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Partner checks were generally positive for the second quarter but not as positive as they usually are, he said.
"Several partners expressed concern about [the second half of 2024], especially since genAI monetization is not happening en masse and is not likely to materialize this year, as management has suggested it would," Difucci told investors.
While U.S. federal business for ServiceNow remains robust, Guggenheim said, it is unlikely to provide the same boost in new annual contract value seen from the second half of 2022 through the first half of 2023.
The less mature state, local and education markets and foreign-government efforts are not expected to compensate for this gap.
Based on the firm's field work and analysis of the IT spending environment, along with the anticipated need for increased business momentum in the second half of 2024, the analyst sees “a material risk that NOW will have to lower top-line subscription guidance for 2024.”
ServiceNow is scheduled to report second-quarter earnings on July 24.
TheStreet Pro's Guilfoyle: all eyes on subscription revenue guidance
"What will be scrutinized will be any updates made to NOW's full-year guidance for subscription revenue of $10.56 billion to $10.575 billion, operating margin of 29% and free-cash-flow margin of 31%," TheStreet Pro's Stephen Guilfoyle said in his July 8 column.
"Any downside moderation made to those projections will reinforce what the Guggenheim team is seeing and will not be taken well by investors," he said.
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Guilfoyle added that of the 27 analysts he found who cover ServiceNow's stock, 12 have increased their second-quarter estimates while 15 have decreased them.
"Keep in mind that NOW often reacts either negatively or not at all upon earning releases before what has been upside momentum for some time now remanifests itself within a few days," said Guilfoyle, who is still long the stock.
Meanwhile, TheStreet Pro's Chris Versace said "the crux of Guggenheim’s downgrade to a sell rating from neutral reflects what it sees as a rich valuation and findings from its field work, which contradicts KeyBanc’s 2024 CIO survey findings."
On July 2, according to TheFly, KeyBanc lowered its price target on ServiceNow to $920 from $950 and affirmed an overweight rating on the shares.
The investment firm's first-half 2024 survey of chief information officers actually points to a slight increase in budget growth for the year relative to previous expectations. Respondents expect a slight acceleration from IT budgets in 2025, the first since the easy comparisons of 2020-2021.
There is less room for optimism in the results and in its team's sentiment than where KeyBanc stood six months ago, the investment firm told investors. But with feedback from CIOs looking more durable than the results and guidance in the first half of the year implied, 2024 appears to be setting up as back-end loaded.
"While we may not agree with Guggenheim’s thinking, NOW shares rocketed higher by more than 25% since bottoming out in late May right before we scooped some up for the portfolio," TheStreet Pro's Versace said.
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