After almost a decade in an uptrend, ServiceNow stock is finally coming back down to earth. The share price reached an all-time high of $708 in November 2021, but has been declining ever since. Last week, it dropped to $406, down 42.5% from its record. In the meantime, the company reported stellar results in both Q4 2021 and Q1 2022, so the stock’s weakness can hardly be attributed to some fundamental business weakness.
In our opinion, there are two main reasons for ServiceNow ‘s decline. The first one has to do with the fact that despite the company’s impressive growth rate, the stock was still extremely overvalued. The second one, which made things much more precise, was the Elliott Wave chart below. Seven months ago, while NOW stock was still hovering around $630, it helped us warn investors that a significant drop was likely to begin soon.
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ServiceNow ‘s weekly chart revealed a complete five-wave impulse, labeled (1)-through-(5), where the five sub-waves of wave (1) were also visible. Wave (2) was a running flat, while wave (4) – a simple a-b-c zigzag. According to the theory, this pattern meant that a correction of similar magnitude can be expected. So instead of extrapolating the rosy past into the uncertain future, we advised caution.
ServiceNow Stock Still Offers More Risk than Reward
The corrective phase of the Elliott Wave cycle usually erases the entire fifth wave of the preceding impulse. With that in mind we wrote that “we can easily imagine the price falling well below the support of wave (4) near $450.” Fast-forward to May 12th, 2022, that’s exactly what happened.
It took another month before wave (5) was really over at $708 and the bears took charge. Given the negative outlook, however, those final gains were not worth chasing. As of yesterday’s close at $433, ServiceNow stock is down by $195 a share or 31% since we first wrote about it in October, 2021. Elliott Wave analysis put investors seven months ahead of that crash.
ServiceNow is a solid business, growing sales at a 30% annual clip, whose valuation has now dropped substantially. Does this make the stock a good investment at ~$430? Unfortunately, we don’t think so. Albeit not as much as at its November, 2021, peak, the company remains quite overvalued. It trades at 11 times its expected 2022 sales and almost 60 times earnings. That is expensive even for a 30% grower. We believe the stock price has more falling to do before it reaches fair value. Hence, we remain on the sidelines.
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