Service Today (NOW -0.18%) went public a decade ago at $18 a share. Its stock began trading at $23.16 on the first day, and later rallied to an all-time high of $707.60 in November. At its peak, the cloud-based digital workflow services provider was valued at $140 billion — or 24 times its 2021 earnings.
Today, ServiceNow’s stock trades around $423 per share with a more modest market cap of $85.4 billion. Like other highly valued tech stocks, ServiceNow has lost some of its luster as interest rates have risen over the past year.
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However, ServiceNow has still generated massive gains for its early investors and will likely continue to generate double-digit sales growth for years to come. So ServiceNow can continue to grow like a weed and catch up with the tech behemoth Microsoft (MSFT -0.09%) — currently worth $1.8 trillion — by 2030?
How fast has ServiceNow grown over the past decade?
ServiceNow helps companies manage their digital workflows on its cloud-based platform. The demand for those services, which replace unstructured work patterns with streamlined and automated tasks, has increased dramatically over the past decade.
ServiceNow served only 602 customers in 2010, but that number has grown to more than 7,400 by the end of 2021. About 80% of Fortune 500 companies now use its services. Its annual revenue increased from $244 million in 2012 to $5.9 billion in 2021, representing a compound annual growth rate (CAGR) of 42.5%, making it profitable on a GAAP (generally accepted accounting principles) basis. in the past three years.
In comparison, Microsoft’s annual revenue rose from $69.9 billion to $198.3 billion over the past 10 fiscal years, representing a CAGR of 11%. Much of that growth has been driven by its move toward cloud-based services, which CEO Satya Nadella made a major push after he took the helm in 2014.
How fast will ServiceNow grow over the next eight years?
ServiceNow’s growth has cooled gradually over the past few years, but it still expects its annual revenue to grow at a CAGR of at least 22.5% from $5.9 billion in 2021 to over $16 billion in 2026.
Management believes that the growing demand for streamlined digital business models, the rapid adoption of cloud services and AI, and the rise of hybrid and remote work will enable ServiceNow to achieve that purpose. It also believes that ongoing manufacturing, supply chain, cybersecurity, and healthcare-related challenges will convince more companies to accelerate their digital transformations.
During ServiceNow’s latest conference call in late July, CEO Bill McDermott assured investors that “secular digital transformation tailwinds are stronger than macro crosswinds” and that its “inclad fundamentals will not doubt” as it continues to expand.
ServiceNow did not provide any long-term estimates beyond 2026. But assuming it generates $16 billion in sales by 2026, then continues to grow at a more modest CAGR of 20% through 2030, it could generate $33 billion in revenue last year. Assuming it still trades at 12 times sales, it could be worth nearly $400 billion at the start of the new decade.
But it will not be more important than Microsoft
That prediction suggests that ServiceNow stock could more than quadruple over the next eight years. However, that only represents less than a quarter of Microsoft’s current market cap. As for Microsoft, it could generate more than $500 billion in revenue by fiscal 2030 if it grows its top line at a modest CAGR of 12% over the next eight years. If Microsoft were still trading at eight times sales during that period, its market cap would have more than doubled to a whopping $4 trillion by last year.
In other words, there’s no viable path for ServiceNow to catch up with Microsoft by 2030. But that doesn’t really matter: ServiceNow’s stock could still generate more revenue than Microsoft’s if the company continues to grow its annual revenue steadily. at least 20% per year until the end of the decade. That may seem like a tall order for most cloud-based software companies, but ServiceNow’s past performance and confident outlook suggest it can sustain its long-term growth rate.
Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft and ServiceNow, Inc. The Motley Fool has a disclosure policy.