The stock market is declining in value so far in 2022. Inflation, tapering, and expected interest rate increases have troubled investors. Many tech companies are carrying tremendous impact. When the market sells, it creates opportunities to buy high-quality companies to sell. This may be the case with Service Today (NYSE: NOW).
ServiceNow is a software-as-a-service (SaaS) company that provides digital workflow solutions to clients. The company offers workflow platforms for IT, HR, customers, and creators. Delivering solutions that increase productivity for businesses is the name of the game. This is why the company boasts 6,900 customers, including 80% of the Fortune 500.
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What happened?
ServiceNow has been a very successful stock over the past ten years. The $ 10,000 investment 10 years ago is worth over $ 200,000 today. However, as we see below, the stock has dropped recently. In fact, it is currently trading more than 25% down from its 52-week high.
NOW the YCharts data
ServiceNow, along with most of the technology sector, will be flying high until late 2021, when cracks in the market begin to form. When inflation broke at 7%, it became clear that the Federal Reserve would need to increase the taping rate and raise interest rates several times in 2022. These rate increases are likely to hurt value. of growth and tech stocks, which value their ability to generate future cash flows. Combine this with market sentiment that appreciations have stretched, investors are locking in gains, and potential problems on the Russia-Ukraine border, and the market cannot maintain its increasing momentum. When a general sale occurs, many high-quality stocks can be sold.
This seems to be the case with ServiceNow. Since the March 2020 market crash related to COVID-19, the stock has typically traded at a price-to-sales (P/S) ratio of more than 20. Now, thanks to macroeconomic conditions, the stock is trading at a lower P/S ratio than before the pandemic, as seen below.
NOW PS Ratio data by YCharts
The fundamentals remain solid
ServiceNow has some amazing fundamentals that should impress investors. First, revenue is growing rapidly. For the first nine months of 2021, the company posted $ 4.3 billion in sales. This is a 31% increase over the same period in 2020. Total revenue grew by 29% to $ 3.3 billion in the same period. For the full year of 2021, the company led for $ 5.6 billion in revenue, an increase of 30% over 2020. In addition, the company reports an impressive non-GAAP gross margin of 85% and a non- GAAP operating margin of 26%. These items suggest that the company is highly scalable and can continue to deliver impressive cash flows to shareholders. ServiceNow delivered $ 1.3 billion in operating cash flows in the first nine months of 2021.
The company reports other encouraging metrics. Its outstanding performance obligations (RPO) remain stable at $ 9.7 billion. The RPO represents the total contract value of future performance obligations – in other words, the income that has not yet been earned but is under the contract to be made. Therefore, the higher the number, the better. This number grew from $ 7.3 billion in Q3 2020 to $ 9.7 billion in Q3 2021. ServiceNow also reports a steady customer retention rate of 98%. This is a critical metric for a SaaS company. It spends heavily on sales and marketing to gain new customers. Keeping 98% of this each year makes this investment worthwhile.
Has ServiceNow already been purchased?
The anxieties have hit the market hard right now in 2022, and they may not be over yet. Uncertainty over the Federal Reserve’s actions in relation to inflation, international conflict, and a general feeling that market appreciations are likely culprits. While many investors sell, these conditions can prove beneficial for buyers in the long run. Many high-quality stocks are now trading at lower values than before the pandemic market turmoil. This is the case with ServiceNow. The underlying business remains solid. Revenue is growing, along with RPO, and the company has a strong foothold among Fortune 500 customers. With the stock trading at a P/S ratio below 20 and 25% down from its 52-week high, it is an ideal time for investors to consider aging shares.
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