Bill McDermott, CEO of German software and cloud computing giant SAP, posed during his company … [+]
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On January 15, I wrote that parts of the workflow platform provider, ServiceNow, were undervalued. After announcing more-than-expected financial results on Wednesday, shares of ServiceNow rose 11% in pre-market trade.
Are the parts now fully appreciated? CEO Bill McDermott told me on Wednesday – when the stock was trading at $ 484 – that its shares were worth $ 800 each. I see four reasons why ServiceNow stock may rise:
- Expectations-Beating financial results
- Properly positioned to capture strong growth tailwinds
- Customer growth and retention
- Organic growth strategy
Expectations-Beating financial results
ServiceNow exceeded expectations for the fourth quarter and raised its guidance for the future above analyst consensus. Revenue rose 29% to $ 1.61 billion – $ 100 million higher than the FactSet analyst agreed. Its adjusted earnings per share of $ 1.46 is 25% higher than last year and three cents above the consensus, according to MarketWatch.
ServiceNow’s forecast for subscription revenue is also higher than consensus. For the first quarter of 2022, ServiceNow expects subscription revenue in the midpoint range of $ 1.163 – slightly below the consensus of $ 1.62 billion. Its full -year forecast for 2022 is for a range whose midpoint is $ 7.03 billion – $ 20 million higher than the consensus.
ServiceNow is growing faster than its industry. As CEO Bill McDermott told me in an interview on January 26, “Our subscription revenue rose 30% and on an ongoing currency basis rose 32% – $ 110 million above the high end of our guide. “
ServiceNow removed the ability to grow rapidly while generating higher profitability than its peers. “For software companies there is a rule of 40 [a software company’s combined growth rate and free cash flow margin should be greater than 40%]. ServiceNow is in a class of its own – we’re a rule of 60 companies [its 2021 revenue growth rate was 28% plus its free cash flow margin of 32%]”He explained.
The ability to generate positive cash flow means it will not borrow money and will incur higher interest costs that are likely to affect companies having to borrow money at variable rates to finance their operations.
Properly positioned to capture strong growth tailwinds
ServiceNow targets an important industry positioned to help companies adapt to the current economic environment characterized by high inflation and limited labor availability. “We help companies with digital transformation – which is a deflationary force because it increases the productivity of every employee. 85% of CEOs interviewed by IDC said they would maintain their success by increasing their technology budgets by 2022. By 2025, that would mean $ 10.7 trillion in market opportunity. Gartner estimates software spending will grow by 12%, ”McDermott said.
At 30%, ServiceNow is growing twice as fast as the industry – and thus gaining market share. “The root cause is that IT strategy is business strategy. The ServiceNow platform keeps employees happy which is important for companies looking to win the war for talent. Our platform helps companies take over , ride, and train employees so they are safe, productive, and happy.We have led a workflow revolution that has streamlined processes that cross different functions such as HR, legal, and finance ”he said.
ServiceNow also helps businesses provide better customer service and boost productivity in application development. As he told me, “Direct customer service is the new standard. We provide a platform for in-depth learning that uses artificial intelligence to understand customer service requirements. Furthermore, there will be 500 million new applications will be developed in 2023 – more than in the last 40 years. There are not enough engineers to do it all. We will make citizen developers. “
Customer growth and retention
Companies can grow better if they have a reputation for giving customers more benefits for the price than competitors. A test of ServiceNow’s ability to deliver superior customer value is whether it wins and retains customers over time.
On that basis, ServiceNow sees a bright future. What if? The company’s growth will “continue to be impressive,” McDermott said. He told me that ServiceNow adds new customers – many of whom make large purchases – and maintains its relationships with them over time.
What if? “We have a 99% customer retention rate. The number of big deals rose 50% in the fourth quarter. We have 1,359 customers with more than $ 1 million in revenue and lots with more than $ 10 million. ”
Organic growth strategy
Investors want to have shares of companies that exceed quarterly expectations and invest in the future. For that, I think it’s better to develop new products internally because the alternative – acquiring companies – is capital intensive and there’s a high probability of failing to recover that capital.
ServiceNow is avoiding growth by hiring. “We have grown through organic innovation. What engineers want is to create new products that help customers learn more and do more. They don’t want to incorporate other people’s technology – that’s what happens when you have growth by acquisition, ”he said.
After the report, Morningstar’s Dan Romanoff raised his target price for ServiceNow to $ 700. As he writes, the recent decline makes its shares attractive as well as strong near-term performance and long-term organic growth.
ServiceNow is more optimistic. “Analysts value our company at 20 times revenue – so it should trade at $ 800 per share,” McDermott concludes.
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