Buy the Dip on ServiceNow Stock

Andrea Kramer

Ahead of earnings -- slated for release after the close tonight -- the shares of ServiceNow Inc (NYSE:NOW) are swimming in red ink today, after the company said CEO John Donahoe is stepping down to head up Nike (NKE). Donahoe will be replaced by former SAP (SAP) CEO Bill McDermott. While analysts and NOW shareholders are punishing the stock, history suggests the pullback could be a buying opportunity for ServiceNow bulls.

The security was last seen 4.1% lower at $219.02, attempting to find support in the $220 area -- where NOW landed after a January bull gap. What's more, the stock is back within one standard deviation of its 80-week moving average, after trading north of the trendline at least 80% of the time over the past 20 weeks. Over the past 15 years, there have been five similar pullbacks for NOW shares, after which the equity was higher three months later 80% of the time, averaging a gain of 19.2%, per data from Schaeffer's Senior Quantitative Analyst Rocky White. From the stock's current perch, another 19.2% jump would put NOW shares back around $261.

NOW stock chart 1023
NOW stock chart 1023

In light of the C-Suite shake-up, no fewer than three brokerage firms cut their price targets on NOW. Specifically, Mizuho, Evercore ISI, and Baird trimmed their targets to $230, $285, and $275, respectively, from previous targets north of $300. Meanwhile, Canaccord Genuity said that ServiceNow shares remain a "buy" for now, but warned that "change is rarely an ally to valuation -- especially in a sector in retreat." The brokerage firm also said it believes the software sector in general is "certainly much closer to bottoming out, [but] is not done going down."

As far as earnings history, it's worth noting that NOW shares have moved higher the day after seven of the last eight earnings releases, including the aforementioned one-day 13.4% surge in late January. On average, the stock has moved 4.9% in the session after earnings, regardless of direction, looking back two years. This time around, the options market is pricing in a bigger 8.3% swing for NOW.

Ahead of the known event, it's not surprising that ServiceNow's short-term options are fetching a pretty penny. The stock's Schaeffer's Volatility Index (SVI) of 56% stood in the 96th percentile of its annual range, as of last night's close. As such, speculators expecting support to come into play for NOW shares may want to consider selling to open puts instead of buying to open calls, or waiting to buy premium after earnings.