Over the past eight years, Microsoft (MSFT -0.24%) transformed itself from an old legacy software company to a high-growth cloud giant. Satya Nadella, who took over as Microsoft’s third CEO in early 2014, spearheaded the company’s “mobile first, cloud first” initiative that converts a large portion of its desktop software into mobile apps and cloud services.
Between fiscal 2014 and fiscal 2021, which ended in June, Microsoft’s annual cloud revenue rose from just 5% of its top line in fiscal 2014 to 41% in fiscal 2021. It also grew at a compound annual growth rate. (CAGR) of 10%, as its earnings per share (EPS) increased to a CAGR of 17%.
Investors who bought Microsoft shares on Nadella’s first day are now sitting at total revenue of nearly 700%. Microsoft remains a rock-solid blue-chip bet for long-term investors, but it’s unlikely to replicate the massive multibagger gains over the next eight years as its cloud business ages.
Photo source: Getty Images.
Therefore, growth-focused investors who were not involved in Microsoft’s previous rally might consider buying shares of a smaller cloud company that still has plenty of room to run: Service Today (NOW 0.74%).
How fast is ServiceNow growing?
ServiceNow’s cloud -based services help companies manage their digital workflows. It only served 602 customers in 2010, but it ended last year with more than 7,400 customers-including about 80% of the Fortune 500.
ServiceNow was founded in 2003, and went public in 2012. It raised $ 210 million with its IPO, and then acquired a long list of smaller companies to expand its portfolio of cloud-based services.
Between 2012 and 2021, the company’s annual revenue increased from $ 244 million to $ 5.9 billion, representing a CAGR of 42.5%. Like many other high -growth cloud companies, ServiceNow was initially unprofitable. But over the past three years, it has been consistently profitable on a generally accepted accounting principles (GAAP) basis while keeping its gross margins above 80%.
|
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 |
Data source: ServiceNow. basis of GAAP.
In fiscal 2022, ServiceNow expects its subscription revenue, which makes up the majority of its top line, to increase by 26% as its non-GAAP operating margin remains unchanged at 25%. Analysts expect its revenue and non -GAAP EPS to increase by 26% and 24%, respectively, for the full year.
A rosy outlook for the future
In an analyst day presentation in May, ServiceNow predicted that it would generate more than $ 16 billion in annual revenue by 2026-representing a CAGR of at least 22.1% from 2021. It also changed its previous target that’s $ 15 billion in revenue in 2026, set only last year.
In January, CEO Bill McDermott told investors that the company’s “organic growth machine” was still in “full flight” and it didn’t have to rely on acquisitions to reach the long -term target. He also stated that as “rising interest rates challenge others,” ServiceNow’s business model will continue to “thrive in any economic environment.”
McDermott believes ServiceNow’s business model is evergreen because it directly benefits from digital transformation trends in large organizations and the transition to hybrid and remote work. Those secular trends are more resistant to macroeconomic headwinds and often accelerate during economic downturns as companies simplify their operations.
Many of ServiceNow’s cloud-based peers share a confident long-term vision. Salesforce (CRM 0.37%)The market leader in cloud-based customer relationship management (CRM) software, expects to increase its revenue by 20% in fiscal 2023 (ending next January) and continue to grow at a CAGR of over 16.3 % between fiscal 2023 and 2026.
Can ServiceNow generate huge multibagger revenue?
ServiceNow is currently trading 64 times forward earnings and 12 times sales this year. As such, it’s a bit more expensive than Salesforce, which is trading at 35 times forward revenues and five times sales this year, but it’s also growing at a significantly faster rate.
If ServiceNow can generate $ 15 billion in annual revenue in 2026 with expanding margins and rising profits, then its stock can be considered to maintain its premium value. If that happens, its stock could easily triple over the next four years. It can also gradually expand its ecosystem with new acquisitions and evolve into a more widely diversified cloud software giant such as Microsoft or Salesforce.
ServiceNow stock may remain volatile this year as rising rates offset higher growth of tech stocks, but I believe it will be higher when the near-term headwind is finally gone.