SUN VALLEY, IDAHO – JULY 09: ServiceNow CEO Bill McDermott walks into a morning session on … [+]
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Since early November, technology stocks have had a difficult trip. Something about increasing interest rates has created a strong trading bet wave that lowers their prices.
Should investors follow those traders or should they view the decline as an opportunity to buy shares of fast -growing, profitable companies at a discount?
The answer depends on the company. Companies that exceed analysts ’expectations and strengthen guidance are still enjoying substantial upward movement. However, as the plunge into Netflix
NFLX
This is in mind when considering the components of ServiceNow
NOW
If you’re willing to contend with the grain of a generally appalling macro environment for stocks, ServiceNow stock should rise in price when investors are eager to have fast-growing tech stocks in the future.
(I have no financial interest in the securities mentioned).
The Service Is Now Strengthening And Rising
On April 27, ServiceNow exceeded expectations for the first quarter and raised the guide for the current quarter. In pre-market April 28 trading, its shares rose nearly 9.5%. In an interview on April 27, CEO Bill McDermott told me the stock was worth $ 800. If he’s right about that, the shares have a 56% upside.
What if? According to a press release, ServiceNow’s first quarter subscription revenues of $ 1,631 million rose 26% – exceeding the consensus of $ 1,621 million. For the second quarter of 2022, ServiceNow expects “subscription revenues to increase 26% in the range of $ 1.67 billion and $ 1.675 billion.”
McDermott expressed enthusiasm about ServiceNow’s performance and prospects. “We did better than expected. We exceeded the guidance, we exceeded the high end of analysts ’expectations and raised the guidance,” he told me.
He is particularly proud of ServiceNow’s 31% increase in current outstanding performance obligations (CRPO) which rose 31% and “the number of deals over $ 1 million grew 41% to 52 – the fastest rate of growth since 2018. “
The Growth of ServiceNow Cash Generating
He sees ServiceNow as unique among its peers because of its rapid growth and high cash flow margins. “We are a unicorn. We are the only software business as a service company that exceeds the 60 rule – our revenue growth rate plus free cash flow margin is over 60. ”
I estimate the number at approximately 75 when you add its consistent currency run rate of 30.5% to its free cash flow margin of 45%, shared with me by McDermott.
Forcing Service Growth Today
Behind the growth of ServiceNow is a product that helps companies adapt to a rapidly changing business environment. “Growth is driven by companies increasing their investment in digital innovation. They are making new investments in technology that improve the lives of employees and customers. Due to the shortage of developers – due to IDC’s forecast of 750 million net new apps will develop in 2025, our ability to empower citizen developers is a game changer, ”he said.
The increasing number of diseases in the world is driving the demand for ServiceNow services. “Since January, there have been new tailwinds. As pure play enterprise market leaders we are how companies have addressed the challenges of inflation, rising interest rates, supply chain challenges, and political instability. Companies are investing in digital businesses to increase productivity – they help retain employees by giving them great experiences with HR systems, ”he said.
It appears that there is a good fit between the company’s products and what businesses need. As he said, “Two years ago, only a third of our enterprise customers were doing digital business, now it’s two-thirds. We give them the ability to provide customers with great user experiences without disrupting their existing systems. It’s a game changer. All new applications must comply with corporate security, governance, and control policies and we allow enterprises to build quickly on platforms that integrate with their old systems. “
Will ServiceNow Stock Make $ 800?
McDermott thinks ServiceNow stock is undervalued. In January he told me that its stock was worth $ 800 per share. He said yesterday, “I still believe. By beating expectations and raising guidance, we expect the market to recognize [the true value of our shares]. However, fears of rising interest rates have pushed the stocks. When the decision on rates is finalized, [it will bounce back]. Meanwhile, we have $ 6 billion in cash and expect it to increase to $ 12 billion, ”he said.
Morningstar was impressed with the report – but kept its target price at $ 700. According to Dan Romanoff, CPA Senior Equity Analyst, “We maintain our fair value estimate for wide-moat ServiceNow at $ 700 per share based on solid results and helpful guidance in the face of uncertainty. We consider the shares attractive after the strong selloff in software stocks. ”
He sees ServiceNow as having more growth potential. “We continue to favor ServiceNow for its long-term organic-driven growth as it continues to leverage its workflow automation power to penetrate existing IT customers more deeply and more broadly into human resources and products. specifically in customer service, as well as continuing to push vertical special versions of the industry. ”
Sadly for investors, ServiceNow has an impressive report in Q4 2021 but its stock has not changed in the past three months. If you think uncertainty about interest rates will continue, you can purchase ServiceNow at a lower level in the future.
If not, now might be a good time to own parts of it.
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