After the huge success of Amazon Web Services, it is easy to see why cloud computing is such a hot sector right now. However, no trend lasts forever and no stock remains a Wall Street darling indefinitely. Today, we’d like to examine another red-hot company in the cloud industry – ServiceNow Inc.
With a market cap of over $120 billion, the California-based company can already be considered a cloud services behemoth. At least as long as one doesn’t know that its 2021 sales are expected to stay below $6 billion. While $6B is by itself not a small feat, it means ServiceNow stock is incredibly overvalued at 20 times sales. Furthermore, the company is barely profitable so its forward P/E ratio of 106 is practically meaningless.
Of course, ServiceNow did not get this overvalued overnight. It has been so for quite a while now, but investors didn’t seem to care as long as it maintained a satisfactory sales growth rate. That growth rate is not expected to decline any time soon, though. So why would it be any different now and what can possibly prevent the stock from going higher still?
Our answer is the Elliott Wave chart above. It reveals the phenomenal and, we admit, very rewarding uptrend ServiceNow investors have been enjoying since its 2012 public debut. As visible, it can be seen as a complete impulse pattern, labeled (1)-(2)-(3)-(4)-(5).
It Does Look Different This Time for ServiceNow Stock
The market has also taken the guideline of alternation in mind. Wave (2) looks like a running flat correction, while wave (4) is a simple zigzag. This means the recent all-time high at $681 a share must be the final wave (5). And that is the thing the bulls should be worried about.
According to the theory, a three-wave correction in the other direction follows every impulse. Normally, the corrective phase of the cycle erases the entire fifth wave. Given ServiceNow ‘s extreme overvaluation, however, we can easily imagine the price falling well below the support of wave (4) near $450. In fact, we doubt that even a 50% drop to ~$340 would make the stock a bargain.
Similar Elliott Wave setups occur in the Forex, crypto and commodity markets, as well. Our Elliott Wave Video Course can teach you how to uncover them yourself!