ServiceNow, Inc. (NOW) dropped more than 15% this year on the broader collapse of technology, as higher fossil fuel prices pushed the market toward energy companies and away from high -growth stocks.
However, once the market has eliminated its near-term volatility, ServiceNow should recover as it operates in a fast-growing market. So, I am bullish on this stock.
Before buying shares, I would wait for the market to create more convenient entry points, which is possible with a 14-day Relative Strength Index of 45 and the long-term nature of current headwinds for technology stocks.
The 14-Day Relative Strength Index indicates whether stocks tend to be overbought or oversold after a sharp rise or fall. The ratio is between 30 and 70. So a value of 45 indicates that ServiceNow is still far from oversold despite the significant downtrend.
Company Details
ServiceNow operates a cloud computing platform that supports businesses that need help managing digital workflows and business processes.
Its clients are public organizations and companies active in various sectors, including financial services, healthcare and telecommunications. The company also serves manufacturing firms, other technology companies, oil and gas operators, and entities in the education and consumer goods industry.
Results for FY and Q4 2021
ServiceNow had a strong last three -month period of 2021 in terms of higher sales and revenue, thanks to a strong increase in demand for its platform services.
Pro forma earnings were $ 1.46 per share, up 25% from the previous quarter, beating the analyst’s average estimate of $ 0.03.
Revenue reached $ 1.61 billion, up nearly 31% from the previous quarter and beating analysts ’median forecast of $ 10 million.
The positive growth of the quarter was marked by significant increases in the following items (percentages refer to year-on-year comparisons):
• Subscription revenue increased approximately 30% to $ 1.52 billion. These will be reported as sales over the next 12 months of operations.
• Approximately 30% increase in current outstanding performance obligations (RPO) to $ 5.7 billion. RPO is the sum of amounts invoiced and amounts invoiced under a contract with a customer.
• Approximately 54% increase in the volume of transactions (it was 135 in Q4 2021) for a net new annual contract value of more than $ 1 million.
The company also reported the following results for the full year 2021:
Total revenue is $ 5.9 billion, a 30% increase over the full year 2020, while revenues per diluted component are $ 1.13, a 91.5% increase over 2020.
Subscription revenue (up 30% year-over-year) represented 93.2% of total revenue, while professional services and others (up 39%) contributed 6.8% of total revenue.
The Company Guidelines for Q1 and FY 2022
For the first quarter, the company expects subscription revenue to be between $ 1.61 billion and $ 1.62 billion, and it also expects its current RPO to increase by 29.5% in the first quarter of last year.
For the full year of 2022, the company expects subscription revenue to be between $ 7.02 billion and $ 7.04 billion.
Wall Street Analysts estimate Earnings Growth
Sell-side analysts on Wall Street estimate that earnings per share of ServiceNow will increase 24.3% this year (from 2021), increase 26.60% in 2023 (from 2022) and increase 26.10% annually. from 2023 to 2027.
The Balance
ServiceNow’s balance sheet is solid. On Dec. 30, 2021, it boasted a display of $ 3.3 billion in cash, while total debt was 1.5-fold less than $ 9.77 billion.
An interest coverage ratio of 5 indicates that the company can easily pay interest on the outstanding debt. The ratio must be at least 1.5.
However, investors should be aware that ServiceNow’s weighted average cost of capital of 8.61% versus a return on invested capital of 2.88% indicates that the investment generates lower income than the amount of capital increase to support. its finances.
This means that unless the company reverses the trend, the company’s profitability and financial condition will worsen.
Relying on higher debt to fund operations, assuming the company is committed to it, could be a bigger problem than it is today.
As the U.S. Federal Reserve restricts credit conditions to curb rapidly rising inflation, the cost of borrowing will certainly rise.
Although, ServiceNow investments are likely to pay off because they are in fast -growing markets.
Outlook
The strong positive trend in customer demand for the innovative ServiceNow platform, coupled with expectations that the market size of business analytics and enterprise software will double in a few years, puts ServiceNow on a good path to become more great.
In addition to enjoying a solid reputation as a workflow partner in the global arena, ServiceNow makes strategic investments in sub-sectors that are recognized as key drivers of the business analytics and enterprise software markets worldwide. .
These include investments in ERP (Enterprise Resource Planning) migration services, software testing automation, and strengthening the financial and tax services platform. Also, a strategic alliance with KPMG to help clients educate about environmental, social and governance (ESG) and to improve resilience to financial risks and cybercrime while promoting digitalization.
The global business analytics and enterprise software market is expected to reach $ 694 billion in 2026, growing at a CAGR of approximately 14.5% during the forecast period 2021-2026.
The growth is attributed to the increasing use of cloud-based services and other innovative technologies in the above subsectors in which ServiceNow invests.
Taking on Wall Street
Over the past three months, twenty -one Wall Street analysts have released a 12 -month price target for NOW. The company has a Strong Buy consensus rating based on 18 Buys, two Holds, and a Sell rating.
ServiceNow’s average price target is $ 674.24, indicating 32.90% upside potential.
Conclusion
As the market grows and the company fuels all the cylinders, it should help generate higher returns on any investment.
ServiceNow says it is on track to become a company generating more than $ 15 billion in annual revenue, up 2.5 times since 2021. The stock price is strongly poised for a rebound, but the market needs to recover. interest in technology stocks and ServiceNow.
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