39.9% return in three months? This IT share still has great potential!

As a shareholder of an IT service company Serve immediately (NASDAQ: A1JX4P) You can consider yourself lucky in the past few months. Stock prices quoted in US dollars have risen by 39.91% in three months (as of September 10, 2021, relevant to all key data).

But the long-term returns in the past have also been excellent. As an investor, you undoubtedly want to know whether you have missed the best time to hold this stock, or whether the company still has sustainable growth potential. From my perspective, the answer is clear.

High returns in the past

If you look at the returns of ServiceNow over different time periods, you should quickly realize that you have done nothing wrong as an investor in recent years. Unless you have no investment. Looking back on the development of the past five years, investors can record a return of 783.65%. This is equivalent to an annual price increase of approximately 51%.

There is no doubt that past returns cannot be extrapolated to the future. However, I personally prefer to invest in a company that has been profitable in the past, rather than a company that has been shunned by the capital market.

Obviously, you rarely can bargain in this way. This is undisputed. However, as an investor, you rarely fall into a value trap, and instead invest more in companies with future-oriented business models.

Stability and growth

If you look at the last quarter’s data and future prospects, it should be clear that ServiceNow has a positive future prospect. However, what I particularly like about ServiceNow is that the company has an extremely stable business model and still has attractive growth opportunities.

For example, the service subscription renewal rate in the second quarter was 97%. This means that 97% of ServiceNow customers have renewed their subscriptions. Although this ratio was sometimes 99% in the past, this value clearly shows that ServiceNow can retain acquired customers for a long time. One of the reasons for this is that ServiceNow is integrated into a large number of workflow solutions. In this case, switching to another IT service provider is equivalent to switching to an ERP system (Enterprise Resource Planning). For large companies, this is very difficult.

In addition, sales for this fiscal year are expected to increase by approximately 28.5%. Although 80% of Fortune 500 companies are already ServiceNow customers, I am optimistic about long-term growth opportunities. If you look closely at the geographical distribution of customers, you will find that ServiceNow is growing faster in Europe in the second quarter of 2021 than in the United States. Nevertheless, compared with the United States, income is still at a low level. If the growth of the US domestic market weakens in the future, ServiceNow still has sufficient growth potential in Europe and Asia.

Appraisal

The company’s estimated P/E (price-to-earnings ratio) is 13.56 and P/E (price-to-earnings ratio) is 42.46, which is by no means one of the bargains in the capital market. But as mentioned earlier, I personally prefer to invest in an “expensive” company with a good business model, rather than a company with a bad business model with a low price-to-earnings ratio.

Because in a long period of time, companies with mixed business models are likely to “die”. In most cases, it is only a matter of time. Due to declining sales and declining earnings, earnings per share are of course also lower. Ultimately, this led to a spike in the price-earnings ratio that should have been low.

in conclusion

In my opinion, ServiceNow is one of the big winners of the coronavirus pandemic. Because the impact of the coronavirus is under tremendous pressure, it is necessary to rely on cloud-based IT systems.

But it’s not just because of the digital aspects of ServiceNow that can benefit from the corona pandemic. Because continuous cost pressure also means that many companies must improve the efficiency of their business processes. This is the specialty of ServiceNow. Therefore, I assume that the company can continue to generate strong returns in the next few years.

Michael owns shares in ServiceNow. The Motley Fool owns shares in ServiceNow and recommends ServiceNow.