On encouraging prospects, ServiceNow stock outperforms top cloud computing competitors

So far, the negative impact of the Covid-19 crisis on the United States has been limited Current service (right now). The cloud-based enterprise software provider reported a 34% increase in subscription revenue in the first quarter in late April and forecasts a 27% to 28% growth in the second quarter (at constant exchange rates, an increase of 29% to +30%). ServiceNow’s recent transaction price is about 388 US dollars, last week a record high of 396.15 US dollars.

As of 2020, ServiceNow’s stock price has risen by 37.4%, while a group of large cloud software companies consisting of Microsoft (MSFT), Adobe (ADBE), Salesforce (CRM) and Workday (WDAY) have experienced an average increase of 13.1%. ServiceNow’s performance even surpassed Amazon (AMZN) stock, which has risen 32.2% so far. Given its strong performance, ServiceNow’s enterprise value is now 16.5 times the consensus revenue estimate of $4.36 billion in 2020.

Although ServiceNow faces some short-term disadvantages, it seems to have weathered the storm well because the company has become the workflow standard for digital transformation. Wall Street is calling for ServiceNow’s total revenue to grow by an average of 25.4% in the next two years, which is higher than the average growth rate of the company’s major large cloud computing peers.

In the third quarter quarter, ServiceNow’s subscription revenue was $995 million, which exceeded the upper limit of the guidance range. Subscription bills increased by 30%. The company completed 37 transactions, and the net contract value (ACV) for the new year exceeded $1 million, an increase of 48% year-on-year. In these first quarter transactions, it completed the second largest new customer transaction in the company’s history and the largest customer service transaction in the Asia Pacific region. 18 of the top 20 deals include three or more products.

Now, digital workflow is an important part of every company. At the beginning of the virus-related shutdown, organizations quickly realized that they needed to make employees work more efficiently at home to stay competitive. ServiceNow CEO Bill McDermott said that ServiceNow’s platform is used to deploy workflow applications to achieve better crisis management and business results.

In mid-May, the company expanded its portfolio of workflow solutions with four application suites and a dashboard designed to help organizations support employees in their eventual return to the workplace. The Safe Workplace suite includes applications for employee health checks and workplace safety management. The dashboard will provide a visual display of the data collected from the app and will overlay a map containing aggregated public data on infection rates.

Some investors worry that business disruption caused by the pandemic will disrupt the trend of digital transformation. However, as organizations seek to achieve smoother workflows in their office-based and teleworker-based teams, the crisis may actually accelerate digital transformation.

It can help ServiceNow mainly provide services to the largest organizations in the world. The company has more than 6,200 customers, including about 80% of Fortune 500 companies. Given the strength of its customers, the company hopes to maintain a high renewal rate (97% in the first quarter). In the March quarter, ServiceNow saw many customers in severely affected industries (such as transportation, hospitality, retail and energy) renew their contracts and even expanded their use.

The company entered the second quarter with great strength and quickly made its market entry sales activity as part of the new “work from home” reality. Nevertheless, ServiceNow management still admits that Q2 and Q3 will be challenging. About 20% of ServiceNow customers may deal with the consequences of virus-related shutdowns for a period of time, which may affect the renewal time.

In the first quarter earnings conference call, ServiceNow Chief Financial Officer Gina Mastantuono said that the company is committed to helping all customers manage during this difficult period. When needed, ServiceNow has taken steps to provide customers with greater flexibility in payment terms.

When proposing the latest 2020 outlook, ServiceNow management took on significant resistance in the next two quarters. The scope of subscription billing has been expanded to address the greater uncertainty of new services and renewal time. On the positive side, the company has fairly good visibility into its subscription billing, half of which comes from outstanding orders. The remaining half is divided equally between contract renewal and new business.

Approximately 80% of the confirmed subscription revenue for the remainder of 2020 has been signed and included in the backlog. At the end of the first quarter, the RPO was $6.6 billion, an increase of 30% (32% at a constant exchange rate), while the short-term portion was $3.3 billion, an increase of 31% (an increase of 33% at a constant exchange rate).

For 2020, ServiceNow’s updated subscription revenue guidance ranges from US$4.15 billion to US$4.145 billion, the exchange rate adjusted growth range is 28% to 29%, and the midpoint is only reduced by US$95 million.