IT service company ServiceNow has aroused enthusiasm among investors with its outstanding report in the fourth quarter of the stock market year. What is even more gratifying for shareholders is that the financial markets experienced a difficult adjustment last week.
This is not the case with ServiceNow stocks. Despite the market adjustments, there is little change in the stock trading week. No wonder, because companies benefit from the digitization and optimization of business processes. In the context of the corona crisis, this development may even accelerate.
Detailed quarterly data
As mentioned earlier, the business data for the fourth quarter of 2020 is convincing. The forecast of earnings per share of $1.06 exceeds 10.3%, so it is $1.17. But ServiceNow can also shine in terms of revenue. Earnings per share were US$0.08 instead of the expected US$0.04 (including special items).
What I particularly like about the ServiceNow business model is that the subscription model ensures the regularity and security of sales. ServiceNow currently has 1,089 corporate customers and sales of more than $1 million. Particularly interesting in this regard is the statement by CEO Bill McDermott, according to which customers are currently renewing 99% of their subscriptions.
Coupled with the acquisition of 89 large customers with sales of more than $1 million in the fourth quarter alone, it proves the quality and stability of the business model. For example, ServiceNow is now supporting the digital transformation of the telecommunications group AT&T.
But not only the data from the previous quarter, but also the prospects for the next fiscal year, have made investors sleep soundly.
Detailed outlook
No wonder ServiceNow can use this business model to make good forecasts for the current fiscal year. Although many other companies are being affected by the coronavirus, this IT service provider expects sales to grow by 28%. There is no comparison with the old economy company.
Therefore, it is no wonder that the current company valuation of the stock is very high. Because quality has its price. In ServiceNow, the information value of the price-to-earnings ratio (price-to-earnings ratio) is not very large. If you calculate the current price of $537 and the earnings per share in 2020 ($4.66, excluding special effects), you will get a value of approximately 115.23 (as of January 29, 2021, related to all key data) ). An incredibly high result.
Therefore, for growth companies, I mainly use KUV (market-to-sales ratio). People associate sales revenue with market value, not results. The KUV for the previous fiscal year was 23.17. With sales growth of 28%, KUV in 2021 will be 18.1.
in conclusion
No matter which valuation metric you use, ServiceNow is and will continue to be an expensive stock. However, this does not necessarily prevent you from buying the company’s stock. Rather, it depends on your investment horizon and goals.
If you want to build passive income as soon as possible, ServiceNow will give you bad advice. Because it is easy to pass another 10 years before dividends are paid here. However, if you want to hold the stock for 10 to 20 years and have a dynamically growing company in your portfolio, then ServiceNow may be an interesting investment opportunity.
Post-ServiceNow: These figures have aroused the excitement of investors! First appeared on The Motley Fool Germany.
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Michael owns shares in ServiceNow and AT&T. The Motley Fool owns shares in ServiceNow and recommends ServiceNow.
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