ServiceNow Is a Buy After $7 Billion Acquisition News, But Watch for This Exit

Former Sarge-fave ServiceNow (NOW) , a firm led by CEO Bill McDermott who himself is a Sarge-fave, is trading sharply lower on Monday morning. The catalyst? A story run by Bloomberg News inferring that the firm is in talks to acquire U.S.-Israeli cyber security start-up Armis. 

Is this opportunity calling? An opportunity to get back into a stock that we exited months ago? Maybe. Let's explore. 

The stock is trading almost 10% lower shortly after the opening bell on Monday, down almost $85 so far. The stock is down 25% from its recent high in mid-May and down more than 35% from its high for the year last January.

Don't forget that, just 10 days ago, ServiceNow shareholders approved the previously announced five for one split of the firm's common shares. Shareholders of record on Tuesday, December 16, will receive four additional shares for each share held. Distribution will commence after the closing bell on Wednesday, and the split adjusted shares will begin trading on Thursday, December 18. Normally, high-priced tech stocks like ServiceNow run higher into a split like this and then quite often trade lower afterwards. In this case, the shares have lost value going into the split and Monday morning's news has exacerbated and accelerated this deterioration in valuation.

Potential Deal

According to Blomberg, ServiceNow is in advanced talks to purchase Armis. The deal price is said to be approaching $7 billion, which would make it one of ServiceNow's largest acquisitions ever and it could be announced as soon as this week. Neither firm appears to be responding to requests or answering questions from the financial media.

Armis CEO and co-founder Yevgeny Dibrov was expecting to go public with this firm in late 2026/early 2027. The firm, which counts more than 40% of Fortune 100 companies as clients, recently raised $435 million in November. That valued the company at $6.1 billion. In August, Armis announced that the firm had surpassed $300 million in annual recurring revenue, which was less than a year after reaching the $200 million mark.

Readers and investors are reminded that, earlier this year, ServiceNow agreed to acquire Moveworks, an AI-focused startup heavily involved in autonomous technology for a rough $2.85 billion. This deal has not yet closed and is still pending, as both sides await regulatory review. 

ServiceNow does not anticipate a problem in getting that deal done. This deal and the one not yet announced do show a willingness to invest in growth as the firm competes with the likes of Salesforce (CRM)  for corporate customer relationship management focused capex spending. ServiceNow is expected to report in late January. The stock currently trades at 49 times forward looking earnings.

The Chart​

I find it fairly interesting ​that NOW shares put in a triple-top pattern of bearish reversal just ahead of trading sideways and then lower for the rest of the year. 

Relative strength is now about as weak as it can get without actually entering into a technically oversold state. The daily MACD is also in sloppy shape as the histogram of the nine-day EMA appears ready to go negative and the 12-day EMA appears ready to cross below the 26-day EMA with both of those lines already in negative territory.

While these readings are all rather bearish, they are also where they would be if the shares were about to reverse higher. Enter the falling-wedge pattern of bullish reversal that has been under development since late October. The shares are now testing the lower trendline of that pattern.

This is actually a perfect setup for a rally from here that could go as far as the upper trendline of that wedge. So, yes, the shares can be bought here. Don't forget though that these shares are probably overvalued, so maybe think this as a trade rather than an investment. 

Additionally, and this is important: should the shares break the lower trendline, that breaks the bullish setup. In plain speak, if that line breaks, get out of these shares faster than you would get out of a bar once that crazy guy who never shuts up sits down next to you.

At the time of publication, Guilfoyle had no positions in any securities mentioned.