ServiceNow Revenues Q1: 29% Revenue Growth, 25% Operating Margins (NYSE: NOW)

Service Today (NYSE: NOW) rose after reporting strong earnings in the first quarter. The company continues to maintain impressive growth rates each quarter and the stock has maintained impressive amid the blood flow to tech stocks. I suspect many of the relatives The outperformance is due to some recent M&A in the enterprise tech sector, and I see the stock continuing to deliver strong returns on the back of its consistent growth and strong profit margins. Although NOW is not nearly as cheap as the cheapest stocks in the tech sector, I still rate the stock as a buy for investors looking to invest in the tech sector at lower risk.

NOW Stock Price Action

I last covered NOW in January, and the stock has fallen 10%. The stock was trading at approximately $ 465 per share before releasing earnings. In that report, I predicted that the stock could show strong performance due to having a long -term earnings guide as well as their strong profitability. That has proven to be true – in fact more than I initially expected – because many other high -growth tech stocks have seen their valuations go even higher. There is another potential reason for outperformance. There have been many deals in the enterprise tech sector, including Anaplan (PLAN) and SailPoint (SAIL). It is possible investors are pricing in a acquisition premium for higher quality enterprise tech companies. Regardless of the current setup, the long-term picture for the stock has only improved considering lower valuations.

NOW Stock Income

NOW delivers powerful results that comfortably exceed the previous guideline. Subscription revenues reached $ 1.613 billion, and the company rose a full -year guide revenue to $ 7.033 billion.

At this point, the positive acceptance in the stock price is less related to the 0.04% improvement in the year -over -guidance but most likely due to the fact that earnings are at least OK – resetting the valuation in the technology sector expectations can also be reset.

NOW’s 29% continued revenue growth is not the highest among peers, but is nonetheless quite impressive considering that the company has maintained a similar growth rate for many quarters since. consecutively.

Furthermore, NOW combined strong revenue growth with a solid profit margin. The non-GAAP operating margin stands at 25%. I’ve noticed that free cash flow margins are very high due to the company accepting prepayment for subscription plans – instead, investors should exclude deferred earnings from free cash flows for a more good understanding of the operational cash flow picture.

On a GAAP basis, NOW also generates solid cash flows, generating $ 75 million in GAAP net income for the quarter. NOW the quarter ended with $ 5.5 billion in cash, representative of a strong balance sheet. Management reaffirmed the 2026 guideline for at least $ 15 billion in conference call revenue.

Is NOW a good long term investment?

Just to make sure we’re on the same page, let’s quickly go back to the business model. NOW is an enterprise technology company that enables its customers to program digital workflows. Here is an example of a digital workflow. The customer’s employee may wish to request a new computer monitor. Without the NOW, this type of request can be routed all to a distribution point (my condolences for this employee) before it is forwarded to the proper department. NOW technology allows the request to be forwarded to the right department without any human intervention.

NOW is the gold standard for digital workflows and this is reflected in their impressive customer lineup.

The long-term trend for digital workflows is clear: more and more people are “busy with work” and interactions can be programmed to save time and improve accuracy. NOW will benefit from continued digitization of workflows.

Is the Stock NOW a Buy, Sell, or Hold?

At recent prices, NOW is still trading very reasonably at approximately 13x sales. Analysts expect that NOW will exceed the 2026 revenue guide, which would have reached $ 15.8 billion back then.

Consensus estimates call for NOW to achieve a 21.7% net margin by 2025, which seems reasonable considering the positive GAAP net margins and the strong non-GAAP margins.

NOW is not as cheap as the cheapest tech stocks – there are too many alternative names at this point. But NOW offers something that works in today’s market: reliability of growth with profitability. NOW there may be a big downside due to other tech stocks trading cheaper, but the premium many can be said to be warranted considering Wall Street’s historical preference for clean stories. I see NOW eventually achieving a 40% long -term net margin. Based on the 25% expected growth rate in 2023 and a 1.5x price to revenue growth ratio (‘PEG ratio’), I would see NOW trading at 15x sales next year. That represents potential returns of approximately 50% over the next 12 months. Major risks in this thesis include disruption to the growth story. As noted above, NOW trades at a known premium and in the absence of a broader tech recovery, the stock has a large gap to fall if the premium multiple falls. The magnitude of that risk cannot be underestimated, though the company’s strong profit margin could provide another layer of support considering the possible catalyst of share repurchase. I rate the stock as a buy as a lower risk play in the technology sector.

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