• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing

Do I Trust That ServiceNow Probably Knocked the Cover Off the Ball in Q2?

I would probably like to go into this Wednesday's earning report bearish, and here's my trade idea.
By STEPHEN GUILFOYLE
Jul 27, 2020 | 10:30 AM EDT
Stocks quotes in this article: NOW, SAP, ACN

It's about trust. Sure, as a trader I have made some dough getting in and out of ServiceNow (NOW) . Would have done better just hanging on. The firm reports it's Q2 financial performance this Wednesday afternoon. I am, given the landscape, and given the exhibited willingness of some portfolio managers to seemingly scalp their largest winners this season, tempted to either take a pass on NOW this season, or take a bearish stance going in.

There are a number of reasons why this is a difficult name in which to position oneself this week. One is that I think the firm probably had one of, if not the finest, quarter in the firm' s history. That's saying something, given the firm's place as a leading software/cloud names that simply makes it easier for business to proceed with... well, business. ServiceNow is thriving in this difficult environment, and I think extremely highly of current CEO Bill McDermott of SAP (SAP) fame, who took the reins in November.

That said, and I don't like to look at valuation in stocks of this type as they do seem to trade more on momentum, levered cash flow and potential, than on current fundamentals. But ServiceNow does trade at 124 times past 12 months earnings as well as 100 times 12 months forward looking earnings. Just a few months ago that number was in the 60's. What I am saying is they have to crush the numbers (they just might) and guide forward aggressively (they just might). So, do I trust that ServiceNow probably knocked the cover off of the ball? Yes. Do I trust that the shares will go still higher, even on good news? I don't know.

What To Look For

For the firm's second quarter, ServiceNow is expected to report EPS of $1.0, which would be good for year over year earnings growth of 42%. Though fantastic, that number would actually be slightly down sequentially. As for sales, the street is looking for $1.05 billion. The revenue number is spot on, would amount to growth of 28%, which believe it or not would be the slowest pace of such growth in recent memory.

The story may not be in business to business for ServiceNow, but could be contract work for both the federal and regional governments in response to the public health emergency. We know that the state of Washington and the cities of Los Angeles and San Francisco in California are clients.

We'll also need to hear more on how much current business deals with Deloitte and Accenture (ACN) are playing out, and just how accretive to performance they are. McDermott will also likely have to comment on the still to be completed acquisition of Belgian start-up Sweagle.

The Chart

Based on the methodical move higher for these shares since the mid-May set-up that really can not be termed a "break-out", there is some chance that shares of NOW could be pulled back toward the shares; own 50 day SMA (currently $401), and not toward a hypothetical price target of $465. The shares did come sort of close, trading above $454 one week ago.

My thinking is that I would probably like to go into this Wednesday evening bearish, but in no way am I brave enough to short the equity. I think, though a bear put spread might be on the expensive side for a name like this, it is probably the way to go bearish, while maintaining a tolerable level of exposure to risk.

Trade Idea (minimal lots)

- Purchase one July 31 NOW $430 put for roughly $14.

- Sell one July 31st NOW $420 put for roughly $10.

Net Debit: $4

Max Net Profit: $6

Max Loss: $4

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Stephen Guilfoyle had no position in the securities mentioned.

TAGS: Earnings | Investing | Options | Stocks | Technical Analysis | Trading | Technology

More from Investing

There Are Interesting Things Happening Beneath the Surface of This Market

James "Rev Shark" DePorre
Aug 8, 2022 4:32 PM EDT

Look for more positioning on Tuesday ahead of two important economic reports.

Can Rhythm Pharmaceuticals Keep Up This Tempo?

Bruce Kamich
Aug 8, 2022 3:01 PM EDT

The stock has surged amid an analyst upgrade.

What AIG's Charts Say About the Stock Ahead of Earnings

Bruce Kamich
Aug 8, 2022 2:03 PM EDT

The stock just tested the underside of the declining 50-day moving average.

Solar Firm Sunrun Continues to Run on the Upside

Bruce Kamich
Aug 8, 2022 1:24 PM EDT

Here's what the longer-term picture looks like.

Weariness Sets in During This Bear Market Phase

Bob Lang
Aug 8, 2022 1:00 PM EDT

Sentiment is starting to turn bullish, but painted with a skeptical eye as the wall of worry is up high.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 09:24 AM EDT PETER TCHIR

    Jobs Report Reaction: Incredibly Strong, But Questions to Ask

    An incredibly strong July jobs report. Not only d...
  • 08:54 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    The Secret to Dealing With FOMO
  • 03:51 PM EDT REAL MONEY

    AMD Second-Quarter Earnings Live Blog

    Real Money's Eric Jhonsa covers 's second-quarte...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2022 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login