ServiceNow (NOW) provides enterprise cloud computing solutions that define, structure, consolidate, manage, and automate services for enterprises worldwide.
I am bullish on NOW stock. (See Analysts’ Top Stocks on TipRanks)
The Defining Tech of the 21st Century
ServiceNow says it aspires to be the “defining enterprise software company of the 21st century.”
It claims 6,900 customers include 80% of the Fortune 500, so it is making progress on this goal. It also has 1,200 customers who provide an average annual revenue of $3.5M each.
Long-time shareholders are certainly believers.
The stock has returned over $257,000, or more than 2,480%, on a $10,000 investment over the previous 10 years. This makes it one of the most successful companies of that period. That’s right – it has a higher return on investment than high-flyers Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), and Amazon (AMZN) over the previous decade.
It accomplished this by growing its customer base, expanding service offerings to existing customers, providing incredible services, investing in growth, and scaling revenue to profitability.
Scaling to Profitability
Revenue grew over 2,000%, and gross profit grew 2,430% over the prior 10 years right along with the share price. Along with growing their customer base, NOW also boasts of a 97% renewal rate.
This metric is key to an efficient outperforming stock in the SaaS sector. SaaS companies tend to spend much of their revenue on selling and marketing expenses (S&M). As long as they are gaining customers at an efficient clip, this investment is prudent.
By having AN extremely high renewal rate, the S&M expenses are not being used to replace current customers as they drop off (customer churn). Instead, the investment in S&M goes to growth. This points to a company which still offers tremendous value even at the current price.
In addition, the company is still very dedicated to gaining new customers. The S&M department is by far the largest by employee head count. The company continues to increase subscription revenues over 30% each quarter on a year-over-year basis. The company is also guiding for 29% total growth for Fiscal Year 2021.
Given the company’s current scale, this growth is no small feat. The company is guiding for $5.5 billion in 2021 subscription revenue. Analysts are more bullish still, predicting $5.8 billion in 2021, and $7.31 billion in 2022.
The attraction to ServiceNow at the current price is clear. The company continues to grow at a tremendous rate, and is now highly profitable and generating tremendous free cash flows. Management invests in customer retention and subscription company growth and the Fortune 500 is tremendously reliant on ServiceNow for workflow systems.
Wall Street’s Take
Wall Street analysts are extremely bullish on NOW stock, with a Strong Buy consensus rating, based on 20 Buys, two Holds, and no Sell ratings.
The average NOW price target of $678.48 implies 7.8% upside potential.
Summary on ServiceNow
ServiceNow has been an amazing investment for shareholders historically.
Despite this run, the stock still has much to offer investors going forward.
Even now, the company is trading at just 18.9x forward sales, which is in line with historical averages. This seems high on some traditional scales, until one considers that the company is still growing at more than 30% compounded annually, and has scaled to profitability successfully.
The short interest is less than 2% of the float, meaning there is little bearish sentiment. ServiceNow is poised to beat the broader market in the years to come.
Disclosure: At the time of publication, Bradley Guichard had a position in securities mentioned in this article.
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