| Snowflake Score | |
|---|---|
| Valuation | 3/6 |
| Future Growth | 5/6 |
| Past Performance | 2/6 |
| Financial Health | 5/6 |
| Dividends | 0/6 |
NOW Stock Overview
ServiceNow, Inc. provides enterprise cloud computing solutions that defines, structures, consolidates, manages, and automates services for enterprises worldwide.
ServiceNow, Inc. Competitors
Price History & Performance
| Historical stock prices | |
|---|---|
| Current Share Price | US$391.71 |
| 52 Week High | US$707.60 |
| 52 Week Low | US$367.71 |
| Beta | 0.94 |
| 1 Month Change | -9.85% |
| 3 Month Change | -21.02% |
| 1 Year Change | -36.61% |
| 3 Year Change | 46.08% |
| 5 Year Change | 222.85% |
| Change since IPO | 1,492.32% |
Recent News & Updates
ServiceNow: Profitable With Resilient Growth And Best-In-Class Renewal Rates
Summary ServiceNow has a leadership position in its core ITSM market, which it can leverage to cross-sell its other offerings to its very large installed base. The company continues to show resilience in uncertain times, maintaining its best-in-class renewal rates and seeing a larger proportion of customers spending more on its platform. Management continues to be positive on hiring new talent for the business and reiterates the ambitious 2024 and 2026 revenue targets it has set earlier. While there has been news about large deal delays, management explains the reasons for these delays and executes well in subsequently closing these deals at a later date. My 1-year target price for ServiceNow is $585, representing 42% upside from current levels. I think we could be seeing one of the best buying opportunities for software companies in this current weakness in the stock market. My strategy would be to invest in the software companies of tomorrow, investing when sentiment is low and riding the strong industry tailwinds when business conditions get better. As such, I think that ServiceNow (NOW) is a great candidate that fits into such a profile. Investment thesis I think that ServiceNow is one of the companies that are key to helping companies with their digital transformation journey. With its leadership position in its core market, the company has significant room to cross-sell its other products and services to its very large installed base. Furthermore, ServiceNow looks to be rather resilient in uncertain times as its renewal rates continue to be best-in-class and it continues to be hiring key talent needed for growth when competitors are seeing renewal rates fall and slowing hiring in the near term. As the guidance for the second half of the year has been largely de-risked and rather conservative, along with continued confidence in achieving their ambitious 2024 and 2026 subscription revenue goals, I think that ServiceNow is in a position where the risk/reward perspective skews positive and thus, presents an excellent opportunity for investors. Overview ServiceNow aims to use its Now platform to make workflows more efficient through the use of technology and digitalization. The Now platform helps to break the silos between different systems to enable cross system collaborations in an organization. The company has 4 main categories to tackle different aspects of the business. The largest segment of ServiceNow is its IT workflow segment that makes up 60% of its business. The IT workflow includes a variety of products and services to IT departments across the entire IT lifecycle. This segment is where ServiceNow's success came from as it is the market leader in the Information Technology Service Management ("ITSM") segment. ServiceNow's ITSM offering automates IT services and has capabilities like machine learning, predictive intelligence, which are offered to customers. The next largest workflow makes up almost 30% of its business includes its employee workflow and customer workflow. The employee workflow aims to help improve productivity and improve employees' experience, automating many typical human resources processes. The customer workflow, on the other hand, helps to improve customer loyalty through better and digital customer experiences. These will include automation of customer service requests and cases. Lastly, the creator workflow makes up 14% of ServiceNow's revenues. The creator workflow allows its customers to develop their own digital workflow applications through a low-code platform. It includes an app engine, which helps customers develop low-code applications quickly and at scale. Deep competitive moat in core ITSM product Every successful company needs to achieve mastery and success in a particular product. Just as Apple (AAPL) has the iPhone, ServiceNow has its ITSM product offering. It is worth noting that ServiceNow occupies an enviable market position of more than 50% market share in the ITSM space and has won the status of market leader in the ITSM segment 7 times in a row according to Gartner Magic Quadrant. The key advantage of the ServiceNow product, in my view, is the benefits it brings to help improve IT productivity using machine learning tools and virtual agents. With the deep expertise in its core ITSM product, next comes ServiceNow's ability to cross-sell to other products. I think that this cross-sell ability hinges on the core ITSM product because the pre-requisite for customers to be convinced to buy other products and services of ServiceNow will come from a loyal installed base with a positive and good customer experience. Another implicit advantage is that ServiceNow has a large installed base from the core ITSM product. Customer Cohort Growth (ServiceNow Investor Presentation) As can be seen by data disclosed by ServiceNow, its 2010 cohort's annual contract value has an annual growth rate of 176%, which showcases the huge opportunity for ServiceNow in relation to more recent customer cohorts. Best-in-class renewal rates I think that although this has been highlighted many times before, it is important to continue to give credit where credit is due. The best-in-class renewal rates we see from ServiceNow do give investors some assurance in terms of the resilience in demand for ServiceNow's offerings amongst existing customers. Although new customer growth and expansion may slow, with this higher renewal rate than that of most of its peers, these higher renewal rates signal to investors the healthy demand and the recurring nature of ServiceNow's products and services. Renewal rates (ServiceNow Investor Presentation) Another point to note is that ServiceNow continues to see more large customers as its customers paying at least $1 million in ACV grew 22% year on year and its customers paying over $10 million in ACV grew by 50% year on year. As a result, in the current quarter, we saw the continued increase in wallet share of its customers as customers continue to increase spend with ServiceNow and on the Now platform even as the global macroeconomic situation remains uncertain. Solid 2Q22 with rock-solid confidence for longer-term targets ServiceNow managed to beat the high-end expectations for subscription revenue growth and operating margin guidance despite CEO McDermott's cautious tone on CNBC 2 weeks before the results. In addition, ServiceNow managed to maintain its best-in-class renewal rate of 99% across all regions and segments. Subscription revenues were up 30% year on year. Operating margin was 23%, one percentage point above guidance due to operating efficiencies while partially offset by FX headwinds. While listening in to the second quarter earnings call, I was encouraged to find that the management was rather positive in their tone for ServiceNow's recently set financial targets. ServiceNow CEO continued to have "rock solid" confidence in the company's 2024 subscription revenue target of $11 billion-plus and 2026 subscription revenue target of $16 billion-plus. This implies 83% growth from 2021 to 2024 and 167% growth from 2021 to 2026, if achieved. Furthermore, the management of ServiceNow continues to see strong demand for automation and digital transformation, and they expect to continue to see the deal sizes get bigger as customers use more of its products. In fact, I think that it was encouraging to see that all of these businesses are doing very well, with at least 10 of the top 20 deals in each of its segments done by ServiceNow, and with its Creator Workflow seeing 20 out of 20 largest deals in the market in 2Q22 actually came from ServiceNow. While the management continued to emphasize that business continued to be resilient for ServiceNow, the main issues ServiceNow is seeing are deal delays. While management may categorize them as deal delays now, I think that these may potentially become deal slippages if the delays continue to be prolonged and business conditions weaken. The reason for the deal's delay, ServiceNow claims, is that customers now need to elevate larger spend decisions to the C-suite. However, the message that management is trying to bring across is to assure investors that while these deals may be delayed and take a longer time to materialize, they are still being closed and most delays that have been delayed earlier in the year have already been closed. Increasing hiring when others are slowing hiring I think that ServiceNow is emphasizing the need to increase hiring now when other technology companies are slowing hiring. Based on headcount data reported in 2Q22, the headcount continued to grow at 27% year on year in the current quarter. At the same time, the astute investor would note that the company still managed to improve on operating margins through improving operating efficiency. This would imply, in my view, that management is being mindful in which areas they are investing in and hiring, while at the same time controlling expenses which they view as not critical or necessary for growth. As such, the hiring has been on the critical areas of research and development, and in their go-to-market staff while management has been careful to control spend on support type staff. As such, I think that the disciplined approach taken by management is commendable and with the global uncertainty, when ServiceNow is hiring, it will be positioned for growth when this period of uncertainty ends. Concerns about deal slippage While I think that the management has communicated rather clearly that they do not expect huge deal slippages, especially for renewals, and that they have expressed a rather positive tone during the recent quarter results, there is always a risk that the slippage in deals come due to external factors not in the control of management. More importantly, the growth targets set by management for its 2024 and 2026 subscription revenues may seem ambitious if the whole industry does slow down and the first signs of a slowdown could be in ServiceNow's expansions and new businesses.
ServiceNow: Won't Lead The Next Bull Market, But That's OK
Summary ServiceNow sees its cRPO dip to the low 20s%. This doesn't bode well for its future revenue growth rates. ServiceNow remarks, as have others, that sales cycles in IT are lengthening, particularly given Europe's impact. The most bullish argument here has to come from its compelling free cash flow line. But some caveats are important to discuss. ServiceNow is not ''that'' cheap at 11x next year's revenues. How investors should think about this valuation. Altogether I remain tepidly bullish this name. Investment Thesis ServiceNow (NYSE:NOW) is an IT service management and workflow productivity company. It's a business that nearly always discloses 98% to 99% customer renewal rates. ServiceNow is a strong cash flow generating business that's well positioned to withstand a recession, that's the thesis that I noted in my previous bullish article on ServiceNow. And since then, in the past 2 months, it appears that the stock has been an underperformer. Author's work Typically, I wouldn't call this underperformance. However, given that "junkier" tech stocks have soared in the past 2 months, I believe that's better to be upfront with this dynamic. Nevertheless, I argue that the bull case here is found in its free cash flow line. That being said, I temper my bullishness given that the macro backdrop has weighed on ServiceNow's near-term prospects. Hence, weighing up all different sides, I remain tepidly bullish on this name. Revenue Growth Rates Trend Lower NOW revenue growth rates During the past few years, being a global company had huge advantages. Companies attained scale and could continue to seek growth at any cost. As we'll soon discuss, ServiceNow didn't fit into that bucket. After all, ServiceNow has consistently reported robust non-GAAP profitability. But I get ahead of myself, as we'll soon discuss its profitability. The theme for large multinational tech companies was to seek exposure far and wide. Today, multinationals are struggling on two fronts. One temporary and one more lasting. The temporary impact that the market is looking beyond is the currency headwinds. This is plaguing the companies' revenue growth rates by approximately 300 to 600 basis, and ServiceNow is no exception. The second headwind that's both more serious and uncertain is about Europe. Companies such as ServiceNow are seeing Europe as creating headwinds in their businesses. Along these lines, this is what ServiceNow's CFO Gina Mastantuono said during ServiceNow's recent earnings call, [...] we do expect the elongated deal cycles that we experienced in the last couple of weeks of June to persist for the remainder of the year. Then, these comments were echoed at a conference earlier in September, [...] what we saw was, deals getting higher level of scrutiny and more approvals that just elongated that sales cycle. However, in both cases, Mastantuono moved quickly to reassure the investment community that she is "confident" that ServiceNow would meet its guidance. ServiceNow's Near-Term Prospects ServiceNow believes that as more companies are forced to be frugal with their budgets, given that for many enterprises there's been a proliferation of workflow platforms, the industry is now seeking platform consolation. The drive is not only to drive efficiencies throughout the workplace but also to reduce companies' overall expenses. For their part, ServiceNow makes the case that even though the sales cycle has elongated, it will not have difficulty in reaching its revenue targets. However, the big focus here from the investment community is that ServiceNow's current remaining performance obligations (cRPO) dipped to 21% y/y, down from 29% y/y back in Q1 2022. In practical terms, ServiceNow's cRPO is a leading indicator of the trajectory that its revenue growth rates will be recognized over time. Ideally, investors want to see software companies' cRPO figures higher than their revenue growth rates, or at least match the revenue growth rates. What investors don't like to see is a dip lower between cRPO figures and revenue growth rates. Obviously, management would make the argument that investors shouldn't be short sighted and overly focused on one quarter's results. On the other hand, keep in mind that any investor that invested in this stock in the past 2 years is unlikely to be holding onto gains. Hence, these dynamics have been plaguing its share price for a while now, this is not just one quarter's performance. Next, we'll turn our attention to discussing its profitability profile. Profitability Profile in Focus What follows are ServiceNow's GAAP operating margins: Q2 2021: 4% Q3 2021: 5% Q4 2021: 2% Q1 2022: 5% Q2 2022: 1% What you see is a business that is barely reporting GAAP profitability. And for a while investors didn't care that a lot of software companies had excessive stock-based compensation, but in the past several months, investors have increasingly questioned whether some of these businesses are not as profitable as we were previously considering. Ultimately, the whole point of paying up for these highly recurring business models is that they should see significant "clean" free cash flows returning to shareholders. Furthermore, the full-year free cash flow guidance at the end of Q1 2022 was for a 31% free cash flow margin, while recent headwinds have dampened these prospects so that ServiceNow only guides for a 30% free cash flow for the year as a whole. However, given that Q1 2022 reported 45% free cash flow margins, while Q2 reported just 16%, investors are now skeptical that in 2023 ServiceNow's free cash flow margins may not bounce back higher, but could actually dip below 30%. Given that the business has more than 60% of the free cash flow for H1 2022 made up of stock-based compensation, investors are rightly asking "what's left for me?" NOW Stock Valuation -- 11x Next Year's Revenues Back in 2020, a business that could be relied upon to grow at 20% CAGR investors would easily be willing to 10x forward sales. The problem for ServiceNow is that we are not in 2020. Indeed, we are getting close to 2023.
Shareholder Returns
| NOW | US Software | US Market | |
|---|---|---|---|
| 7D | 5.8% | -1.3% | -2.5% |
| 1Y | -36.6% | -33.3% | -23.2% |
Return vs Industry: NOW underperformed the US Software industry which returned -33.3% over the past year.
Return vs Market: NOW underperformed the US Market which returned -23.2% over the past year.
Price Volatility
| NOW volatility | |
|---|---|
| NOW Average Weekly Movement | 6.8% |
| Software Industry Average Movement | 8.7% |
| Market Average Movement | 6.8% |
| 10% most volatile stocks in US Market | 15.5% |
| 10% least volatile stocks in US Market | 2.8% |
Stable Share Price: NOW is not significantly more volatile than the rest of US stocks over the past 3 months, typically moving +/- 7% a week.
Volatility Over Time: NOW's weekly volatility (7%) has been stable over the past year.
About the Company
| Founded | Employees | CEO | Website |
|---|---|---|---|
| 2004 | 16,881 | Bill McDermott | https://www.servicenow.com |
ServiceNow, Inc. provides enterprise cloud computing solutions that defines, structures, consolidates, manages, and automates services for enterprises worldwide. It operates the Now platform for workflow automation, artificial intelligence, machine learning, robotic process automation, performance analytics, electronic service catalogs and portals, configuration management systems, data benchmarking, encryption, and collaboration and development tools. The company also provides information technology (IT) service management applications; IT service management product suite for enterprise’s employees, customers, and partners; IT business management product suite; IT operations management product that connects a customer’s physical and cloud-based IT infrastructure; IT Asset Management to automate IT asset lifecycles; and security operations that connects with internal and third party.
ServiceNow, Inc. Fundamentals Summary
| NOW fundamental statistics | |
|---|---|
| Market Cap | US$78.97b |
| Earnings (TTM) | US$184.00m |
| Revenue (TTM) | US$6.60b |
429.2x
P/E Ratio12.0x
P/S RatioIs NOW overvalued?
See Fair Value and valuation analysisEarnings & Revenue
| NOW income statement (TTM) | |
|---|---|
| Revenue | US$6.60b |
| Cost of Revenue | US$1.48b |
| Gross Profit | US$5.12b |
| Other Expenses | US$4.93b |
| Earnings | US$184.00m |
Last Reported Earnings
Jun 30, 2022
Next Earnings Date
n/a
| Earnings per share (EPS) | 0.91 |
| Gross Margin | 77.53% |
| Net Profit Margin | 2.79% |
| Debt/Equity Ratio | 35.4% |
How did NOW perform over the long term?
See historical performance and comparison