Why ServiceNow Stock Fell 16% in April

Shares of ServiceNow (NYSE: NOW) were falling last month, primarily due to a post-earnings sell-off in the software-as-a-service (SaaS) stock.

ServiceNow actually beat estimates in its first-quarter report, but the results weren't enough to convince investors that its business model is sustainable. Software stocks have plunged this year on fears that AI programs like Anthropic's Claude Code will disrupt them, though, thus far, there's little indication in the numbers that that's happening.

Nonetheless, Anthropic's revenue is soaring, and there is anecdotal evidence that smaller companies are beginning to use AI tools to design custom software programs, rather than buy them from enterprise software companies.

By the end of the month, ServiceNow stock had lost 15.5%, according to data from S&P Global Market Intelligence. As you can see from the chart below, the stock fell early in the month, recovered those losses, and then fell on the earnings report later in April.

NOW data by YCharts

ServiceNow falls again

ServiceNow's pullback came in two separate waves. The first was in the second week of April, when the stock fell along with the broader sector in response to ServiceNow's new announcement of its Mythos AI model, which was reportedly too powerful to be released to the public due to its ability to exploit cybersecurity vulnerabilities.

That reflected a pattern in the stock all year as ServiceNow has repeatedly fallen after Anthropic releases a new product update. Later that week, ServiceNow declined again after UBS downgraded the stock from buy to neutral in response to budget pressure on application software, and believes its edge over other application software stocks has faded.

Finally, the stock tumbled in its first quarter, seemingly on margin pressure, even as top and bottom-line results were in line with expectations. Gross margin in the quarter fell from 79% to 75%, which seemed to reflect its pivot away from the seat-based model and toward AI products like Now Assist, though that transition seems likely to lead to continued margin pressure.

Image source: Getty Images.

Can ServiceNow bounce back?

The challenge for stocks like ServiceNow is that even after falling more than 50% from their peak, they are still expensive, according to traditional metrics.

Based on generally accepted accounting principles (GAAP) earnings, the stock trades at a price-to-earnings ratio of 54. That's not a bad price for a stock growing revenue consistently by 20%, but investors rightfully have doubts that ServiceNow can maintain that growth rate.

For now, it's up to the software company to convince investors otherwise.

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