Everywhere you look in this stock market there are scary looking charts. ServiceNow is a sensational business. It ticks every box for exciting. It helps its enterprise and corporate clients with their digital and cloud operations. It has high powered top management. It is growing at an explosive rate which is projected to continue. Everything looks great except the chart which looks terrible. The shares turned negative on my triple indicator system at a price above $600 against yesterday’s close of $428 but now they have completed a top area and broken down. In chartist parlance the line of least resistance is down as is the case for so many shares in this market. What seems to be happening is that shares in the companies with the most outstanding fundamentals are putting up the stiffest resistance but it seems they may all succumb in the end. It looks horribly like freefall time.
The Q1 2022 report was sensational.
“The constant currency numbers speak for themselves. Subscription revenue growth was 29pc, CRPO growth was 30.5pc, operating margin surpassed 25pc. And all were above the high end of our guidance range. In fact, our raised guidance today which Gina will cover shortly also speaks for itself. As does the 52 deals over $1 million in Q1 that were up 41pc year-over-year. It’s clear that the world is beginning to understand the power of this platform. We said in January that our fast growth would accelerate in Q1, it did. Now, three months later, we expect subscription revenue growth to accelerate for the full year, it will. We said that ServiceNow’s fast growth would continue to be paired with the leverage of a global market leader. Now, with our accelerating revenue growth and free cash flow, we’re already approaching the rule of 60 for the full year. We have strong adoption from existing and net new customers. Our rolling four quarter pipeline remains ever strong. We’re delivering predictable, fast growth with exceptional free cash flow.”ServiceNow Q1 2022, 27 April
So what is the problem. I don’t know for sure but I have seen this before. Great results and the shares get hammered. Maybe a strong performance is fully discounted and the shares are just too high. Alternatively the macro head winds are going to turn into a hurricane and the company is going to be blown off course by a crumbling economy. Or maybe the shares will fall and a year from now they will be climbing and we will be wondering what all the fuss was about.
Whatever the answer the chart is warning of weakness ahead and as we have seen with share after share once the price goes into freefall the value destruction can be devastating.
Another problem is the asymmetricality in the way investors respond to results in a bear market. If they are good there is a short, sometimes explosive rally and then the shares sink back again. If they are bad its Armageddon. Snap disappointed with its last quarterly results and has since lost two thirds of its value. Bear markets in full flight can be astonishingly brutal.
This is not a bear market anymore; it is a crash. It is a bit like a virus which is jumping from share to share. It may even be that the collapse taking place in the cryptocurrency market is showing the way for shares and there is no way the Fed can come to the rescue this time. On the contrary they have become the problem as investor face up to just where interest rates might be going. Inflation is like a genie. Once it gets out of the bottle it can be hard to put it back.
It is not the end of the world. We have been here before and just when you think the world is coming to an end it turns out it isn’t and it is back to the races again but my best guess is there is a fair bit more pain to come before it is happy days again. The good times lasted so long that there is a world of excess in the system that needs to be unwound before the global economy can get back to an even keel.
And there is always the possibility that there is some deeper problem going on. The emergence of China as a manufacturing powerhouse meant that demand could easily be absorbed without igniting inflation but now there are capacity problems everywhere we look. Non-inflationary growth may be harder to come by in a world wrestling with other big problems like global warming, habitat destruction and the need to make a dramatic shift to more sustainable growth.
This is all speculation. The hard fact is that all my charts are pointing down and telling me that we have not yet seen the worst of this savage bear.
Even this though does not mean that buying and holding great stocks like ServiceNow won’t work. It is hard to do but it should work. Look at any great stock and it has been through some savage declines on its way to long-term glory. A classic case is Amazon which lost 96pc of its value in 2000-2001 and still went on to become one of the best performing stocks of all time and did really well even if you bought before the crash.
One thing to remember is that by the end of a savage bear market everyone who has ever thought of selling will have sold so the only way is up as long as the fundamental story remains intact.