Low angle view of the facade with the sign and logo of the office of the cloud computing company ServiceNow in The [+]
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Investors lack the information they need to decide which stocks to buy. Certainly, there are rules that lead to changes in a company’s stock price.
One of my favorites – “beat and rise” says that if a company releases quarterly revenue and earnings growth and raises its forecast more than investors expect, the stock price will rise. Otherwise it will go down.
Investors won’t know until late if a company will lose and grow every quarter. But if they review a company’s track record in this regard and assess whether the company is making good investments in future growth, investors can make reasonably long -term bets.
Unfortunately for investors, this rule is periodically overridden by another-institutional opacity (IO). IO refers to the sudden decisions of institutional investors – or of the computers they use – to make high volume bets to buy or sell a whole class 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 the reasons for their business decisions in advance.
One such institutional trade is sector rotation – the decision to transfer capital from high -growth technology companies to so -called cyclical stocks driven by expectations that higher rates interest will increase in value of the latter.
That’s what comes to mind when considering the 25% drop in stock at ServiceNow-operator of a business cloud computing service-since it hit in November. The decline coincided with a 7% decline on the NASDAQ, a tech heavyweight index
NDAQ
However, analysts share ServiceNow at 26% higher than their current level. If ServiceNow loses and rises when it reports fourth-quarter results on Jan. 26, its stock could rise rapidly.
Given its rapid and sustainable growth, ServiceNow components are likely to increase over the longer term.
(I have no financial interest in any of the securities mentioned in this post).
Sector rotation does not include growth equities
IO isn’t just for individual investors-it’s also detrimental to conservation funds. how ‘So what? As The Wall Street Journal reported, hedge funds that have had profitable runs-due to their holding shares in fast-growing tech companies-posted their worst performance in years in 2021.
How badly did the hedge fund last year? They returned an average of 11.9% in 2021, less than the 28.7% return of the S&P 500 and 22.2% earned by the Nasdaq. The Journal attributes most of the pain for hedge funds to losses by the end of 2021 for “growth and technology -focused strategies [which] represents one of the largest pots of money in the hedge fund industry at over $ 4 trillion.
The losses were triggered by the sector’s rotation from growth to finance due to expectations of higher interest rates. The Journal wrote that growth stocks “are becoming weaker as investors turn to 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 nomination as Fed Chairman in November triggered a selloff. Is this really the reason? We have no way of knowing which investors sold their tech stocks, how many stocks they released, and what triggered their decisions.
If Powell’s appointment caused tech stocks to collapse, how did these hedge funds get caught up to the point of not getting profit amid rumors of the nomination?
With higher interest rate expectations already known, are there other benefits to investing in cyclical stocks that, judging by the BKW Nasdaq Bank Index (up only 0.5% since the beginning of November), are not been successful? Would it be better for investors to bet on trampled growth companies that have a strong probability of beating and rising?
ServiceNow performance and perspective
When ServiceNow released its latest earnings, it exceeded expectations and raised its guidance for its third quarter. However, his stock has fallen.
how ‘So what? According to MarketWatch, ServiceNow’s third-quarter revenue rose approximately 31% to $ 1.51 billion, $ 30 million higher than expected, with adjusted earnings per share of $ 1.55 16 cents higher than estimates of analysts.
ServiceNow’s revenue forecast for the fourth quarter is slightly higher than expected. Specifically, ServiceNow’s fourth -quarter subscription revenue forecast is $ 1.52 billion, $ 10 million higher than the analyst’s average, while the company’s billing forecast is $ 2. .31 billion, met 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 made by businesses in the next two and a half years. There aren’t enough engineers in the world to do that; ServiceNow offers a layer of “hyper-automation” to achieve this.
When ServiceNow released its fourth-quarter results on Jan. 26, investors expected $ 1.6 billion in revenue, 28% more than a year earlier, according to MarketBeat.
To exceed expectations, the company needs to forecast growth of more than 25% for the current year. how ‘So what? for 2022, investors expect ServiceNow revenue to grow by 25%, from $ 5.88 billion to $ 7.37 billion, according to analysts surveyed by Zacks.
ServiceNow growth process
Unlike hedge funds and other institutional investors, individuals who buy stocks are not judged on annual performance. These individual investors can judge their success over the longer term.
Based on this, ServiceNow wins. Specifically, I researched 36 public technology companies. For the decade from 2010 to 2020, ServiceNow’s revenue topped the list-growing at an average annual rate of 59.2% while its stock grew 44% annually.
ServiceNow operates four processes that contribute to its long-term growth. As I wrote in June 2021, these include:
- This creates attractive value for customers. For example, ServiceNow helped Lloyds Banking Group’s payment operations unit increase customer satisfaction by resolving issues 70% faster, reducing errors and eliminating common tasks for customers. agent. Such value creation helps ServiceNow win new customers, prevent them from becoming competitors, and maintain a long -term relationship with ServiceNow.
- It grows organically – rather than by extraction. ServiceNow has grown by adapting its core service to new business departments. In particular, he has expanded his workflow management skills 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 talented talent. Change depends on hiring and motivating talented people, and ServiceNow says it’s doing well. Last June, McDermott told investors the company had hired 3,000 new people. He also said, “Our employee engagement scores are rising. Our people are really happy and… motivated to become the fastest growing SaaS company in the world.
- It empowers people and empowers them. ServiceNow has a process for turning those skills into results. As CFO Gina Mastantuono told me, “Every employee’s job is tied to the strategy and priorities needed to achieve $ 10 billion and $ 15 billion in revenue. Each person has three to five goals that link what they do to business priorities. »
What does all this mean for investors? If Wall Street analysts are worth it, shares of ServiceNow are trading at a 25% discount on its target price. If that means anything, you can buy stocks now and enjoy a 36% return on investment when the stock reaches the target price, according to WallStreetZen.
If ServiceNow can exceed growth expectations and raise forecasts above 25%, its stock could explode. But a Fed announcement for higher interest rates could further lower ServiceNow’s stock.
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