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Wolves no longer need to hide their lasciviousness behind sheep’s clothing. They are welcome everywhere. ― Marty Rubin
Now, we first look at ‘cloud‘ play ServiceNow (NYSE: NOW). The stock is trading roughly at the same levels as two years ago, though the company continues to deliver solid revenue and profit growth. Are the shares still priced at a valuation where they can ‘hissed‘ again in the coming quarters or is the stock more likely to be range bound? A review follows below.
Looking for an Alpha
Company Overview:
July Company Presentation
ServiceNow is located in Santa Clara, California and operates as an enterprise cloud computing solutions provider. The company offers multiple capabilities to help clients automate various workflows through a cloud based platform on a SaaS basis.
July Company Presentation
The company was founded nearly 20 years ago and has grown to a current market cap of about $88B and trades at about $435 per share.
July Company Presentation
The company gets about two-thirds of its revenue from North America, and the rest comes from overseas and you can see the breakdown of revenues by workflow below.
July Company Presentation
Second Quarter Results:
The company posted second quarter numbers on July 27th. The company delivered $1.62 per share in non-GAAP earnings for the quarter, beating expectations by more than a nickel per share. Revenues rose 30% on a year-over-year basis to $1.82 billion, beating consensus by about $60 million.
July Company Presentation
Subscription revenues rose 25% from 2Q2021 to nearly $1.66 billion. The company was affected by a strong dollar. Excluding currency effects, subscription growth was up more than 29%. Current outstanding performance obligations or cRPOs stood at $5.75 billion at the end of the quarter. This represents 21% growth, 27% on a constant currency basis.
July Company Presentation
The company continues to diversify their customer base and now has over 1,450 customers who bill at least $1 million annually. The company’s renewal rate remains best-in-class at 99%.
July Company Presentation
It was a solid quarter, through and through. However, it should be noted that management has removed forward guidance. This can be seen in the graphics below.
July Company Presentation July Company Presentation
Analyst Commentary and Balance:
Since the second quarter results came out, more than 20 analyst firms including Oppenheimer, Citigroup and Jefferies have reissued Buy or Outperform ratings on the stock. It should be noted that more than half of these ratings contain slight downward price target revisions to reflect ServiceNow’s leadership reducing guidance somewhat. The price targets offered range from $495 to $650 per share. Guggenheim seems to be the only pessimist on the stock, as it initiated the shares as a Hold with a $510 price target three weeks ago.
About two percent of shares are currently short. Insiders, on the other hand, become frequent sellers. Many officials have made what appear to be several hundred transactions so far in 2022, spread over each month of this year totaling tens of millions of dollars. No insider buying of shares for at least two years. My guess is that many insiders have automated sales programs in place.
The company ended the second quarter with just over $3.8 billion in cash and marketable securities against just under $1.5 billion in long-term debt.
Verdict:
The current analyst consensus has ServiceNow earning around $7.30 per share in FY2022 as revenues rise nearly 24% to $7.3 billion. They see similar sales growth in FY2023 with earnings rising to $9.25 per share.
July Company Presentation
The company is delivering consistent revenue and earnings growth. The stock is certainly cheaper from a valuation perspective than it was two years ago when shares were trading at a similar level. However, this equity still trades at nearly 60 times this year’s expected earnings and roughly 12 times sales. With a forward P/E ratio of around 2.5 times its expected growth rate, NOW is too expensive for my taste. This is especially so in an environment with rising interest rates and slowing global growth.
ServiceNow appears to be a very well-run company, but that is more than reflected in the current share price in our opinion.
A just law is made with thoughtful communication and truthful debate, a corrupt law is forged to limit such things. ― CAA Savastano