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The sharpness of the recent technology correction has many investors wondering: when will it be enough? After weeks of continuous decline and failed attempts to rise, many investors decide whether to time below or stay away from the markets until there is a steeper decline.
The good news is that with this correction, many high-quality stocks that were previously out of reach to buy from an appreciation perspective have become more attractive. One such name is ServiceNow (NOW), one of the leading vendors of IT service management software and one of the largest pure-play publicly traded enterprise SaaS companies. A long-time favorite on Wall Street especially after the management of former SAP CEO Bill McDermott, ServiceNow has seen a remarkable fall from a recent high, dropping ~ 30% from an all-time high above $ 700 in November. Year to date, ServiceNow has dropped by more than 20%.
The fate may be changing, however, with the recent release of ServiceNow earnings in Q4. The stock rose ~ 10% in after-hours trading in response to strong results, which featured top and bottom line beats as well as accelerations in billing growth.
My opinion on ServiceNow is widely skeptical, and the reason is simple: it’s all about appreciation, and ServiceNow’s appreciation has seen vast changes during its boom and bust cycle over the past two years. . Currently, I am upgrading my view in ServiceNow to neutral.
That positive swing is driven by two factors. The first, as already mentioned, is appreciation. ServiceNow is a company that always trades at a premium, which some investors may argue, a high quality and category -leading company like ServiceNow deserves. However, at the same time, ServiceNow’s continued high valuation after the pandemic (often trading in mid-teens multiples of forward earnings) has left the company in the kind of correction we’ve seen recently.
That correction also fixed the difference in appreciation, to a large extent. With current share prices close to $ 484, ServiceNow is trading with a market cap of $ 96.40 billion. After we removed $ 4.93 billion in cash and $ 1.58 billion in debt from ServiceNow’s latest balance, the company’s results the value of the business is $ 93.04 billion.
Now, for the current FY22 financial year, Wall Street analysts expect ServiceNow to generate $ 7.37 billion in revenue, representing 26% y/y growth (data from Yahoo Finance). Against that bulk revenue, ServiceNow trades with 12.5x EV/FY22 revenue. Not exactly cheap, but a reasonably reasonable premium because of the quality of the stock, its world-class leadership, and its incredible traction on customers and its move toward bigger recurring revenue deals. It’s also 4-5 lower compared to what the company traded at its peak last quarter. If and when ServiceNow’s bulk valuation drops below 9.5x FY22 revenue (representing approximately $ 370 target price), my neutral recommendation is even more buyable.
The second reason why I’m leaning more positively on ServiceNow is the fact that its top-line performance has also improved. Last quarter, I said that the drop in ServiceNow charges indicates that revenue growth should also drop. This quarter, strong commercial momentum returned the growth of ServiceNow’s re -acceleration charges, as we’ll review in the next section.
Overall, I think the best stance on ServiceNow remains “watch and wait”, but if the stock continues to slide (especially below $ 400), it’s time to pull the trigger. For now, tracking this one and adding it to your watch list is the best step.
Q4 download
ServiceNow performed well in Q4, which is part of why I think a near-term rebound (unfortunately for those of us looking to ride on lower prices) is supported. See Q4 results below:
ServiceNow Q4 results
ServiceNow Q4 earnings deck
ServiceNow’s revenue in Q4 grew at a 29% y/y pace to $ 1.61 billion, beating Wall Street’s expectations of $ 1.60 billion (+28% y/y) by one margin point.
While the size of this beat isn’t terribly impressive, what I’m more excited about is the ServiceNow results in charges. As software investors know, for companies in the mainstream subscription/recurring revenue business model (and ServiceNow, with a whopping 94% of its revenue coming from subscriptions, it’s definitely falling into the bucket). this), the charges represent a better long -term picture of a company’s growth than revenue. That’s because the charges take the deals signed in the quarter, and defer revenue/RPO growth, which will be recognized as revenue in subsequent quarters.
ServiceNow’s top line trends
ServiceNow Q4 earnings deck
Last quarter, I mentioned the concern that ServiceNow’s growth in charges of 25% y/y in Q2 and 26% y/y in Q3 – is an almost certain sign that revenue growth will also decline. mid-20s. And with consensus growth expectations for FY22 calling for high-20s growth, I saw danger in the story. But this quarter, ServiceNow was able to surprise us by re -accelerating to 33% y/y growth, preventing any near -deceleration concerns.
And in addition, one of the reasons driving this strength is the strength in the number of deals that generate> $ 1 million in annual recurring revenue. The company signed 135 deal with more than $ 1 million in annual contributions, up 52% y/y compared to last year’s Q4.
Here is some additional anecdotal context from CFO Gina Mastantuono’s prepared statement on the Q4 earnings call:
ServiceNow’s ability to quickly respond to the needs of businesses when and where they need us most is why we have become the trusted digital platform to drive change. This is why our renewal rates are best in class, creating a solid foundation on which we grow each year. So in 2021, we added more incremental subscription revenue than we reported in 2016.
I want to pause there for that to fall apart. In 2021, we added another 2016 ServiceNow to the top line, incredibly organic growth in size, while generating over 30% free cash flow margin […]
From an industry perspective, energy and utilities have more than doubled ACV’s net new contribution since last season. Business services and healthcare and life sciences also had a solid Q4, with ACV’s very high double-digit net new growth. Our renewal rate is a best in class 99%, which continues to demonstrate the stickiness of our business while the Now Platform remains mission critical as part of our customers ’operations. These businesses not only remain loyal ServiceNow customers, but our customer cohorts continue to show solid expansion over time. By the end of Q4, we had over 1,350 customers paying us over $ 1 million in ACV.
Our approach to targeting the right enterprise customers yields the best ROI and can grow with us over time. In Q4, we closed 135 deals worth more than $ 1 million in net new ACV in the quarter, up more than 50% year-over-year. In addition, our Better Together story resonates because 18 of our top 20 deals include five or more products. “
The point in the margins should also not be missed. ServiceNow’s pro forma operating margin in Q4 rose one point to 23% in the quarter, as shown in the chart below:
ServiceNow margin trends
ServiceNow Q4 earnings deck
It also places ServiceNow comfortably in the “Rule of 40” category, with 29% y/y revenue growth and 23% pro forma operating margin giving ServiceNow a score of 52.
ServiceNow also generated a record $ 1.87 billion in free cash flow in FY21, representing a high 32% FCF margin and growing 29% y/y.
Major takeaways
With its recent share price crash and strong results that showed the expectation of billing/revenue growth accelerating again (or at least, not declining), ServiceNow was making a more attractive investment in January than it did at the end of 2021. Given the current appreciation of ~ 12x forward earnings, however, I will still wait and wait for ServiceNow to drop to <$ 400 before buying this stock without guilt.