Why AI Stock ServiceNow Flopped on Friday

Key Points

• The company is reaching deep into its pockets for cloud services.

• It's apparently paying over $1 billion to one of its cloud providers, according to a media report.

• 10 stocks we like better than ServiceNow ›

Business process solutions developer ServiceNow (NYSE: NOW) didn't finish the stock trading week on a high note. The company's share price fell by nearly 3% that day, primarily on news that it will apparently spend a hefty amount on cloud services. This was on a trading session that saw the S&P 500 (SNPINDEX: ^GSPC) close 0.4% higher.

That's one expensive cloud

Towards the end of the trading day on Thursday, Bloomberg reported that ServiceNow has agreed to use the cloud-computing services provided by Alphabet's core Google unit.

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Image source: Getty Images.

The financial news agency, citing an unidentified "person familiar with the agreement," wrote that ServiceNow will pay $1.2 billion for this across a five-year term.

Like many tech companies, ServiceNow utilizes the services of cloud providers already, but some investors were surely taken aback by the price tag for the Alphabet arrangement. They might have also been spooked by the company's reveal, in a regulatory document filed on Thursday, that it has committed $4.8 billion in total on such services through 2030.

When contacted by Bloomberg for comment on the story, ServiceNow only responded that it has multiple cloud service contracts. Alphabet refused to offer any comment.

Post-earnings profit taking

It's also likely that the pullback in ServiceNow on Friday was due to some profit-taking by opportunistic investors. The market was clearly impressed with the company's second-quarter earnings report published late Wednesday; it notched convincing beats on both the top and bottom lines, after all.

I don't think Friday's move should scare anyone away from ServiceNow stock. Particularly with its artificial intelligence (AI)-enhanced offerings, the company's offerings are clearly resonating with clients, and should continue to do so.

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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and ServiceNow. The Motley Fool has a disclosure policy.