According to documents submitted by 13F, one of the most bought stocks among hedge funds in the second quarter of 2021 was ServiceNow Inc. (now, finance).
This event really stood out to me, not only because of the number of acquisitions, but also because of the name of the acquisition. In the three months to the end of June, some hedge fund heavyweights increased their stock positions.
These hedge funds have a reputation as successful technology investors and private market investors, so they may know a lot about the industry in which ServiceNow operates.
Hedge fund buy
Hedge funds that increased their equity positions in the second quarter include
Steve Mandel (Trades, Portfolio) Lone Pine Capital, Viking Global Investors,
Chase Coleman (Trading, portfolio) Tiger Global and
Lee Ansley (Transactions, portfolios) maverick capital. All these hedge funds are successful technology investors, and Tiger Global is quickly becoming one of Silicon Valley’s largest venture capital investors.
Recent earnings
ServiceNow recently reported incredibly strong growth in the second quarter. The cloud-based management software manufacturer reported adjusted revenue of $1.4 billion, an increase of 32% year-on-year. Subscription revenue was US$1.3 billion, an increase of 31%.
Long-term trends are driving revenue growth. The most important of these trends is digital transformation, which is accelerated by the pandemic.
The company is becoming a leading platform for the digital transformation of many different businesses. Its main Now Platform makes this possible through a data model, an architecture, and a workflow platform.
Strong ceo
It was Bill McDermott who was in charge of the company at this critical moment in the company’s history. McDermott’s resume is impressive. From 2002 to 2019, he worked at the European software giant SAP. He became CEO in 2010 and tripled the company’s market value in eight years.
McDermott resigned from SAP in 2019 and transferred to ServiceNow. At that time, he cited “the company’s strength in cloud computing and enterprise software and the challenges facing further building a vibrant company” as his reason for joining. He is an empire builder, hoping to build another empire.
The visionary CEO’s goal is to achieve annual revenue of 15 billion U.S. dollars for the group by 2026. Taking into account its recent outstanding performance, I think it is possible to achieve this goal. Customers are also stickier. When ServiceNow’s system is already embedded in the organization, changing the workflow management software is challenging. This should support the company’s growth by providing a recurring revenue stream to support marketing plans and acquisitions.
The company’s cash-generating capabilities are also incredible. In the first six months of this fiscal year, it generated approximately US$800 million in free cash flow. Therefore, companies seem to have enough cash for growth plans.
Priceless
One disadvantage of the current stock is its valuation. The company’s stock’s current corporate value to sales ratio is approximately 17. Compared to the industry average of 22, this looks cheap, but if the growth does not reach the level of Wall Street, it will not have much room for lofty expectations.
However, for investors preparing to exceed this valuation, the stock does seem to provide an attractive proposal. This is a fast-growing technology company with sticky customers, visionary and successful CEOs. The strong cash flow growth target for the next few years is impressive, and management can use it to support its growth strategy.
What also needs to be considered is the insight of the above-mentioned hedge funds into the company’s interactions with other businesses. They may have seen how ServiceNow’s software has completely changed the process and believe that the business has greater potential.
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