Service Today‘s (NYSE: NOW) the stock price jumped 9% on Jan. 27 after the cloud-based enterprise services provider posted its fourth-quarter earnings. Under a generally accepted accounting principles (GAAP), its revenue rose 29% annually to $ 1.61 billion. Its net income increased 53% to $ 26 million, or $ 0.13 per share.
On a non-GAAP basis, its revenue grew 30% to $ 1.63 billion, beating analysts ’expectations of $ 30 million. Its net income rose 26% to $ 296 million, or $ 1.46 per diluted share, and beat estimates by three cents.
ServiceNow’s headline numbers look healthy, but should investors still buy this high-growth cloud stock as rising inflation and higher interest rates are pushing the cycle toward a more conservative investment?
Photo source: Getty Images.
What does ServiceNow do?
ServiceNow provides a wide range of cloud-based services that streamline digital workflows for IT professionals, employees, creators, and customers.
ServiceNow only served 602 customers in 2010, but it ended in 2021 with more than 7,400 customers-including about 80% of the Fortune 500. Of that total, 1,359 customers have an annual contract value of more than $ 1 million – representing 25 % growth since last year.
How fast is ServiceNow growing?
ServiceNow primarily measures its growth in terms of its subscription revenue, subscription charges, current outstanding performance obligation (cRPO), and total outstanding performance obligation (RPO). Its RPO is calculated by adding its deferred earnings to its backlog, and it gives investors a clearer picture of its forward demand. Its “current” RPO will be recognized as income over the next 12 months.
All four growth metrics remained stable throughout the pandemic, as the move toward remote employment highlighted the need for streamlined digital workflows. That momentum continued throughout 2021, even as more employees physically returned to work. The company also ended the fourth quarter with a renewal rate of 99% – which has remained unchanged since last year.
|
Growth* (YOY) |
FY 2020 |
FY 2021 |
|---|---|---|
|
Subscription revenue |
31% |
28% |
|
Subscription charges |
31% |
28% |
|
cRPO |
30% |
32% |
|
RPO |
31% |
32% |
Source: ServiceNow. YOY = Year to year. *Ongoing currency terms.
For 2022, ServiceNow expects to increase its subscription revenue by 28% on a consistent monetary basis. It also expects to generate more than $ 15 billion in annual revenue by 2026-which will represent a compound annual growth rate (CAGR) of at least 20.9% from its $ 5.81 billion non-GAAP revenue in 2021.
During the conference call, ServiceNow CEO Bill McDermott said the company is not “dependent on M&A for growth,” that its “organic growth machine is in full flight,” and that its “pipeline is stronger. than ever before. ” McDermott also said that as “rising interest rates are challenging others,” ServiceNow’s business can still “thrive in any economic environment.”
Stable GAAP margins and profits
In the past, bears have often dismissed ServiceNow as just another high-growth cloud company with no revenue. However, that all changed by the end of 2019 when it became firmly profitable on a GAAP basis for the entire year.
ServiceNow also remained profitable through GAAP measures in 2020 and 2021, while its gross subscription margins remained stable on a GAAP basis.
|
Weather |
FY 2019 |
FY 2020 |
FY 2021 |
|---|---|---|---|
|
Kita |
$ 3.46 billion |
$ 4.51 billion |
$ 5.90 billion |
|
Gross margin |
83% |
83% |
82% |
|
netong kita |
$ 627 million |
$ 119 million |
$ 230 million |
Source: ServiceNow. basis of GAAP.
ServiceNow’s earnings are still a bit volatile in GAAP, due to its continued investment in its own ecosystem and smaller acquisitions, but its stable gross margin indicates that it still has a lot of pricing power in its niche market.
But can ServiceNow maintain its premium valuation?
ServiceNow’s business looks healthy, but its stock is currently trading at 67 times forward earnings and 14 times sales this year. Those appreciations aren’t superfluous, but they’re still not comfortably high in a market that seems allergic to more expensive growth stocks.
Analysts expect ServiceNow’s non -GAAP revenue and earnings to grow by 25% and 21%, respectively, this year. Zendesk (NYSE: ZEN)which also incorporates workflow automation tools into its cloud-based customer relationship management (CRM) service, is expected to generate comparable top- and bottom-line growth as ServiceNow this year-but it trades on 107 times forward revenue and eight times its year sales.
ServiceNow may be cheaper than Zendesk, which has not yet earned GAAP measures, in terms of its revenues. But in terms of its sales, where most cloud software stocks are valued, it looks more expensive.
However, ServiceNow’s very strong growth rates, stable margins, improved profitability, and clear plans for the future justify the higher value. Therefore, I believe that ServiceNow is still one of the few growth stocks that investors can consider to accumulate in this volatile market.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool counseling service. Let’s be motley! Asking an investing thesis-at least one of us-helps all of us think critically about investing and make decisions that will help us become smarter, happier, and richer.