Why ServiceNow Looks Like A Buy-and-Forget Stock

enterprise software company ServceNow (NYSE: NOW) may not have a reputation of Microsoft o Salesforcebut as a reliable growth stock, hard to beat.

In this episode of “Beat and Raise” recorded on Ene. 27Fools contributors Will Healy and Brian Withers discuss ServiceNow’s latest quarter and how the cloud stock continues to post strong growth numbers even as its market cap exceeds $ 100 billion.

Brian Withers: Will, we will talk about ServiceNow. If you can, for members unfamiliar, tell us a little bit about what ServiceNow does before you jump into revenues.

Will Healy: Yes, ServiceNow is an enterprise management company. Well, they sell enterprise management software, I must say. This is over $ 100 billion in market cap. Many of you have never heard of it just because it’s business-to-business, but it’s overwhelming. It’s a big market too, because companies want it Broadcom, as Salesforce is in this as well. It’s big and it’s growing fast. For Q4, revenue reached $ 1.61 billion, that’s a 29 percent year-over-year increase and more than estimates. EPS was a 25 percent increase, so it also beat estimates. Again, for Q at 22, they again predict $ 1.61 billion and that is an increase in estimates. More or less are tracking the results of fiscal year 2021. Revenue rose 30 percent, while EPS rose 28 percent throughout the fiscal year.

Brian Withers: The market seems to really like the result. I’m looking at the share price now, it’s nine percent, so earnings were released on Wednesday after closing, so Thursday was the first trading day after earnings were released. With a beat, beat, and raise, I hope the market response will be positive.

Will Healy: It was a difficult market but the market liked the results they got from ServiceNow. Honestly with these concerns, it’s really hard to find fault. They are still dependent on North America. Those tech companies that you see as they grow, there is a lower percentage in the US, a higher percentage especially in Asia and perhaps less Europe to a lesser extent. That has remained the same and I mentioned it earlier, the competitive market has so many big players in it, but I think just because of the rapid development of the industry, that doesn’t affect them, but these are things that can affect to them in later years maybe when the market slows down. But for now, it’s a pretty solid performance. You get a 29 percent increase in free cash flow. Increasing a billion dollars or more customers by 25 percent, 99 percent of customers are renewing.

Brian Withers: I’ve always loved when an enterprise software provider like this could have million-dollar customers. It simply says that the services they provide are incredibly sticky and valuable, not only to the IT department but to the entire enterprise. I’ve always loved the one-million-dollar customer number and to see it grow 25 percent in a competitive market, that’s a huge tribute for ServiceNow. I like that you mention that the valuation, it’s a nice valuation now, has gone down a bit.

Will Healy: Yes, I think sales are only 18 times, which is high from an average S&P 500 perspective. But for a fast-growing technology company that’s really not that high and it’s the lowest level since fall of 2020. As you can see in the chart, it didn’t match the performance of the S&P 500 and like many other tech stocks, the stock has fallen over the past few months. But with the solid results this company has started, I think it will be a bit short for a drop. I do anticipate this company’s stock that is, it will return.

Brian Withers: Yes. I love the fact that’s another piece and I haven’t looked at ServiceNow in depth yet, but the fact that it makes those are GAAP earnings-per-share numbers, a $ 1.46. That’s really incredible for a high-growth tech company.

Will Healy: Sorry.

Brian Withers: You can’t speak. [laughs]

Will Healy: Yes, I am speechless. I believe they are GAAP. I forgot to confirm that before, just check that.

Brian Withers: Amazing.

Will Healy: I’m sorry.

Brian Withers: Amazing. Whatever the end, Will.

Will Healy: Just a very solid quarter. Again, it’s business-to-business, so it doesn’t get as much attention as one Apple or Google or a Alphabet can be obtained. But I think this is what investors need to pay attention to, even if they don’t see the product in action.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool counseling service. Let’s be motley! Asking an investing thesis-at least one of us-helps all of us think critically about investing and make decisions that will help us become smarter, happier, and richer.

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