ServiceNow Stock: $ 15 Billion Future Too Clear To Ignore (NYSE: NOW)

Digitalization has not only changed the way we interact with each other, but it has also changed the way business is run, with changes towards eliminating intermediaries, lowering costs, increasing productivity. , and towards AI -powered operations. Service Today (NYSE: NOW), as a leader in workflow automation platforms, is benefiting from this change because no one is going back to traditional ways after the pandemic. According to management, this is more of a change caused by the pandemic that will result in continued demand in addition to the very positive outlook provided by the IDC and Gartner forecast. As a result, NOW’s future is stable with a long -term outlook, and is on track with its long -term goal of organic growth trajectory toward its $ 15 billion mark in 2026.

Despite its strong performance, NOW is currently under pressure due to concerns about the Russo-Ukrainian conflict; however, analysts believe that these geopolitical tensions have created a good opportunity to buy into a pullback. NOW its Q4 2021 has ended with strong topline growth and strong outlook provided by management and trading below the lower range of Wall Street’s $ 600 target price. Despite its bearish price action today, NOW is a good candidate for a pullback.

What now?

Despite market problems such as the great resignation, rising inflation, a slowing global growth forecast, and growth now being speculated as temporary, management assures their investors that they are currently running a “ well-sustained demand environment. ” Despite the known headwinds, the leadership views the pandemic as a temporary obstacle that will not stop the growth of NOW. In fact, CEO Bill McDermott said:

Digital technologies stimulate the growth of deflationary force. They enable new business models, speeding up productivity while reducing costs. 85% of chief executives will support or increase technology budgets this year, and that’s according to IDC’s global CEO survey. IDC has raised their forecast for digital transformation, now a $ 10.7 trillion opportunity to 2025. Gartner estimates that global software spending will increase by 12% by 2022. This data shows clearly more than a change caused by pandemic. Source: Q4 2021 Revenue Calls

Another catalyst of NOW is its partnership -driven organic growth capabilities, which carry solid potential for the company and boast an estimated $ 15 billion topline by 2026. Bell Canada, NVIDIA (NVDA), Lockheed Martin (LMT), at Google Cloud (NASDAQ: GOOGL). NOW has recently taken another step ahead of its competition, with its new AI-Powered solutions that help customers achieve positive returns on their investments. Finally, despite the price increases that occurred last year that affected its affordability and received some negative feedback, ServiceNow was able to close its Q4 2021 with outstanding growth in its customer cohorts, such as as shown in the image below.

In fact, its total number of customers with an ACV of more than $ 1 million had an impressive growth of 25.25% YoY in Q4 2021, up from 23.01% in the same quarter last year. Additionally, ServiceNow is experiencing strong usage of its platform with 70 million users worldwide, according to management. This indicates a stronger market presence and it will soon achieve its long -term goal, as stated below.

The pace of digital investment is accelerating. Demand will continue to grow in 2022. Businesses are turning to ServiceNow to create new business models to address the new ways employees and customers want to interact. The Now Platform offers the speed, flexibility and innovation that companies need. We are close to $ 15 billion and more and will be the leading enterprise software company of the 21st century. Source: Q4 2021 Revenue Calls

Growing Bottom Line

NOW was able to increase its subscription revenues to $ 5,573 million in 2021, up 30% from $ 4,286 million in 2020. However, the recognized growth was lower than last year, a 32% growth compared to its number. in 2019. Although, that doesn’t mean it shows deteriorating performance. In fact, from an overall revenue perspective, NOW’s performance of 30.47% is better than its peer, SAP (NYSE: SAP), which generated just 1.84% year in revenue growth. Moreover, in examining its total operating margin which also generated a slower figure of 4.36% in 2021 than 4.40% in 2020, its performance was somewhat better than SAP which generated 19.26% in 2021, compared to 23.51% in 2020. Although both suffered from slowing margins, NOW will adjust its cost of depreciation in line with its recent assessment of equipment that will extend their estimated useful life by three to four more years. .

As a result, we expect a reduction in depreciation cost, which will contribute approximately 100 basis points to the gross margin in 2022, which will be only 50 basis points in 2024.

As quoted above, there is a possibility of improvement in its margins and a lower chance of having weakening charges next year. Unlike negative emotion from its inefficiencies to its margins, NOW demonstrates effective marketing spending, as described below.

As a result, it helped the company generate a positive trend under it.

By looking at normalized net income to eliminate non -recurring costs, such as the tax benefit recognized in 2019 of $ 560 million, we can clearly see that NOW is actually generating a better bottom line in annually.

The Market Is Hesitant in Today’s Uncertainty

NOW is currently showing price weakness today that could trigger a potential pullback. If there is a pullback, the $ 459 zone could serve as its first strong support. The price has already broken 20 and 50 days of its simple moving average, indicating bearish price action in the coming weeks.

NOW is currently trading below the lower range of Street’s $ 600 target price, indicating a 9% potential increase and a potential pullback will help improve it.

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However, NOW is trading with a higher multiple compared to its peers, with a following P/S of 18.48x compared to its peers ’average of 7.86x. However, in my opinion, NOW is somewhat appreciated especially looking at its 5 year average P/S of 17.0x and compared to its forward P/S of 6.97x in 2026.

Major Takeaways

Today’s weaknesses and growth concerns are only temporary. NOW’s strong guidance on its free cash flow margin of 31%, its positive subscription gross margin of 86%, and a flat 25%subscription operating margin in 2022, assures its investors that it is not would be inefficient compared to its peers, as management said in their latest revenue call.

While rising interest rates are challenging others, ServiceNow’s business model is built to thrive in any economic environment. We are not deterred by opportunity as our customers ’demand for digital innovation continues to grow.

NOW maintains a liquid position, with $ 3,836 million in current deferred revenue for most of its $ 4,949 million current liabilities. It improved its long -term debt to $ 1,484 million in 2021 from $ 1,640 million last year. Continuing to provide value for its shareholders, NOW is a buy on its pullback.

Thanks for reading and stay safe everyone!

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