Low-angle view of the facade with the sign and logo of the office of the cloud computing company ServiceNow in … [+]
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Investors lack the information they need to decide which stocks to buy. To be sure, there are rules that drive changes in a company’s stock price.
One of my favorites-“beat and raise” says that if a company reports quarterly earnings and earnings growth and raises its predictions more than investors expect, the stock price will increase. Otherwise it will go down.
Investors won’t know until it’s too late if a company will lose and raise every quarter until it’s too late. But if they examine a company’s track record in doing so and assess whether the company is making good investments in future growth, investors can make reasonably long -term forecasts.
Sadly for investors, that rule is periodically governed by another-institutional opacity (IO). IO refers to the sudden decisions of institutional investors – or of the computers they operate – to make high volume bets to buy or sell an entire category of stocks.
IOs are particularly difficult for individual investors because unlike publicly traded companies – which must disclose detailed information about their performance and prospects – institutions do not have to disclose in advance the rationale for their trading decisions.
Such an institutional trade is a sectoral cycle-the decision to move capital from high-growth technology companies to so-called cyclical stocks driven by expectations of higher rates. of interest will increase the value of the latter.
This is in mind considering the 25% drop in stock of ServiceNow-operator of a business cloud computing service-since it came to prominence in November. The decline coincided with a 7% decline on the tech heavy NASDAQ
NDAQ
However, analysts peg 26% of ServiceNow’s stock above where it is trading today. If ServiceNow loses and rises when it reports fourth-quarter earnings on Jan. 26, its stock could rise rapidly.
Given its continued rapid growth, ServiceNow shares are likely to rise.
(I have no financial interest in the securities mentioned in this post).
Sector Rotation in Growth Stocks
IO isn’t just for individual investors – it also hurts hedge funds. What if? As the Wall Street Journal reported, hedge funds that enjoyed profitable running-because they owned stock in fast-growing technology companies-suffered their worst performance in years in 2021.
2021 is not a good year for hedge funds. They returned an average of 11.9% in 2021 – short of the 28.7% return of the S&P 500 and 22.2% earned by the Nasdaq. The Journal attributes most of the hedge fund’s pain to losses in late 2021 for “growth strategies and technology-focused accounts for one of the largest money pots in the more than $ 4 trillion hedge-fund industry. “
The losses were triggered by sectoral rotation out of growth and in financial stocks due to expectations of higher interest rates. The Journal wrote that growth stocks “became weaker as investors moved into sectors such as finance, which have traditionally benefited from higher rates.”
I’m glad it was interesting that investors told the Journal that Jerome Powell’s November renomination as Fed Chair triggered the selloff. Is that really the reason? We have no way of knowing which investors sold their tech stocks, how many shares they discarded and what triggered their decisions.
If Powell’s nomination caused tech stocks to plummet, how did those hedge funds get caught so flat-footed that they didn’t take their profits when the rumors of the nomination were happening?
With expectations of higher interest rates already known, is there still a further increase in investment in cyclicals – which compared to the BKW Nasdaq Bank Index (up only 0.5% since early November) has not been made properly – or is it better for investors to bet on growing companies that have a high probability of losing and rising?
Performance and Prospects of ServiceNow
When ServiceNow last reported earnings-it exceeded expectations and raised the guide for its third quarter. But its stock fell.
What if? According to MarketWatch, ServiceNow’s third-quarter revenue rose approximately 31% to $ 1.51 billion-$ 30 million above expectations-as its fixed earnings per share of $ 1.55 were 16 cents above those estimates by analysts.
ServiceNow’s revenue guidance for the fourth quarter was slightly higher than expected. Specifically, ServiceNow’s fourth-quarter subscription revenue guide was $ 1.52 billion-$ 10 million more than the analyst’s average while the company’s forecast for billions-$ 2.31 billion-was in line with expectations.
ServiceNow said its service allows companies to build more applications with fewer engineers. As CEO Bill McDermott told MarketWatch, “About 500 million new applications will need to be built by businesses over the next two and a half years. There aren’t enough engineers in the world to do that; ServiceNow offers hyper -automation layer “to achieve this.
When ServiceNow reported fourth-quarter results on Jan. 26, investors were expecting $ 1.6 billion in revenue-28% above last year, according to MarketBeat.
To beat expectations, the company will need to forecast growth to exceed 25% for the current year. What if? for 2022, investors expect ServiceNow revenues to grow 25% from $ 5.88 billion to $ 7.37 billion, according to analysts surveyed by Zacks.
ServiceNow Growth Processes
Unlike hedge funds and other institutional investors, individuals who buy stocks are not judged on annual performance. Individual investors can judge their success over a longer period of time.
On that basis, ServiceNow wins. Specifically, I researched 36 public technology companies. In the decade from 2010 to 2020, ServiceNow’s revenues topped the list – which grew at a 59.2% average annual rate as its stock rose 44% in a year.
ServiceNow performs four processes that contribute to its long-term growth. As I wrote in June 2021, these include:
- This creates compelling value for customers. For example, it helped Lloyds Banking Group’s payment operations unit to increase customer satisfaction by solving problems 70% faster, reducing errors and eliminating mundane tasks for agents. Such value creation helps ServiceNow gain new customers, prevent them from bolting on rivals, and buying more services over time.
- It grows organically – rather than by extraction. ServiceNow has grown by adapting its core service to new corporate departments. In particular, it has expanded its capability to manage workflows from IT service management to IT operations management and business management. If ServiceNow can sell more to its current customers as it adds new ones, it should maintain rapid growth.
- Its culture attracts and inspires great talent. The change depends on hiring and motivating talented people and ServiceNow says it does it well. Last June, McDermott told investors the company was hiring 3,000 new people. He also said, “Our employee engagement scores are rising. Our people are really happy and … shine to be the fastest growing SaaS company in size in the world.”
- It empowers people and holds them accountable. ServiceNow has a process for turning these skills into results. As CFO Gina Mastantuono told me, “Every employee’s work is linked to the strategy and priorities needed to reach $ 10 billion and $ 15 billion in revenue. Every single person has three to five goals that relate to what they do with the company’s priorities. ”
What does all this mean for investors? If Wall Street analysts are worth it, ServiceNow stock is trading at a 25% discount to its target price. If that means anything, you can buy shares now and enjoy a 36% return on your investment when shares rise to the target price, according to WallStreetZen.
Later this month, we’ll see if ServiceNow can meet growth expectations and raise the guideline above 25%, its stock can come out. But a Fed announcement for higher interest rates could lower ServiceNow’s stock even more.
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