Buy Service Now: Enterprise Tech Soon to Buzz Higher (NYSE: NOW)

Service Today (NYSE: NOW) has not released earnings in the past week, but the stock is rising higher as it becomes clear that enterprise tech remains strong despite the current market environment. Such a realization is unlikely It’s surprising considering that the results weren’t very promoted during the pandemic, at least not as noticeably as with e-commerce operators. On its 2022 Analyst Day, NOW showed confidence in its ability to grow even in the current environment. NOW money is pouring in and raising the long -term outlook on growth. I expect the stock to continue to work strongly in the coming year as Wall Street has unfairly targeted even higher quality names in the technology sector.

NOW Stock Price

After dropping approximately $ 407 per share in May, NOW rallied significantly from lows and is now trading around $ 504 per share.

While a 20% rally in just a few weeks may seem “too early,” it’s worth noting that a rally has long been a must in the tech sector especially with names that continue to to drive strong revenue results.

Why is ServiceNow So Important?

In today’s environment, it’s more important than ever to understand the business models of the stocks you own, and imagine how they will perform in difficult market conditions. NOW found its stock trading to have vulnerabilities along with the tech sector even though its product can be said to be mission critical for its customers. NOW is an enabler of digital workflows.

Here are some examples. Customers can use NOW to create employee workflows, such as enabling their employees to connect to the right department for their IT queries. Without NOW, companies may need to waste time and money on hiring staff just to redirect requests.

Their customers can use NOW to create workflows for their own customers, such as handling fraud disputes.

While NOW may not offer the same sexiness as some other tech names, perhaps the lack of sexiness is exactly why it is the perfect business model in the current environment. NOW products are used every day and only grow in importance as economic conditions worsen, as it becomes more difficult for customers to find ways to save on costs.

ServiceNow Key Metrics

NOW delivered consistently strong growth, with subscription revenues growing at a 30% clip last year.

NOW has driven strong growth due to its 125% net expansion rate.

NOW says only 10% of its customers use all four workflow products.

Unlike many tech peers, NOW has been profitable on a non-GAAP Basis for many years, with margins growing from 18% to 25% by 2021.

While many tech names are lowering the guideline, NOW has even raised its medium term guideline, as it already sees 2024 subscription revenues coming in at $ 11 billion and non-GAAP operating margins entering. at 27%.

In the long run, NOW expects at least $ 16 billion in revenues by 2026.

That projection almost completely matches the consensus estimates.

Is NOW Buying Stock?

At a recent conference, the leadership said:

So we see and hear from customers that there continues to be a strong demand environment for our products. At The ServiceNow platform really serves as a deflationary tool for many of our customers.

Think about having to drive productivity and efficiency in an inflationary environment until the recession, we can really help our customer journey. But a potential slowdown also doesn’t happen in isolation, right? And what you see amid the backdrop of COVID’s re -entry into a hybrid distributed workforce, the great resignation the focus on employee engagement is more relevant and more important than ever.

Sure, the stock isn’t nearly the cheapest available in the tech sector, but a premium is guaranteed considering strong margins and key results even in the midst of a tight economy. Wall Street seems to be beginning to understand that not all tech stocks are created equal. Many names are cutting back on guidance because of rising interest rates – but many enterprise tech companies like NOW are seeing continued strength, as their growth stories remain intact even today. Crashing into tech stocks will make it look like these are dangerous names with rich valuations and questionable business models. NOW shows that this is not the case – the company even had $ 4 billion in net cash on its balance sheet last quarter.

I see stock trading up to 15x the price on bulk sales. That represents a 1.5x price to income growth ratio (‘PEG ratio’) based on a 40% long term net margin assumption. NOW has approximately a 45% increase over that target over the next 12 months. The main danger in this thesis is appreciation. NOW isn’t nearly as cheap as many tech peers – the stock shows a huge downside if that premium is lost. That premium could be lost if the company faces competition that threatens its long -term outlook on growth. That hasn’t happened yet, and NOW appears to be incurring migration costs when its customers use the product longer (because of all the digitally created workflows). For those looking to invest in the tech sector but are afraid to take higher risks, NOW remains a marketable opportunity, one that provides steady growth and positive free cash flow.

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