Despite this week’s volatility, ServiceNow (New York Stock Exchange: Now) stock is up more than 65% year-to-date and has a significantly higher price-to-sales ratio than its peers. For many people, these metrics are terrifying. However, in our view, ServiceNow is attractive. The company has a unique platform that is perfectly suited to the current large-scale global digital transformation opportunity, which is still in its infancy. More specifically, the total addressable market is huge, the long-term changes currently underway are being accelerated by covid, and NOW has the solutions and leadership to capitalize for a very long time. In fact, our long-term view, combined with the company’s continued strong execution, leads us to believe that Wall Street doesn’t appreciate how truly valuable this business continues to be. .
overview
ServiceNow is a cloud-based technology company that provides a subscription-based software as a service (“SaaS”) platform that enables organizations to digitize and automate workflows in various areas such as information technology, human resources and customer service. helps. Please name a few. The solution has improved organizational productivity and cost savings, and ServiceNow continues to “build and grow” many large customer relationships.
For those of you who prefer to watch a video (rather than read this article), here’s a short 4-minute video overview of ServiceNow and why you’ll love it.
Now Platform
Thanks to the company’s visionary founder and chairman, Fred Rudy, the ServiceNow platform is ready for a time when organizations generate far more data today than they did in years past, and how they need it. , is in the right place at exactly the right time to take advantage of the vast digital transformation opportunities. Leverage efficiently and effectively across departments. While there are many standardized Now software packages, the entire Now platform provides one data/architecture model that improves workflows across your organization and prevents data redundancy.In addition, the Now platform can be easily integrated with third-party applications via APIs and subscription-based A payment model that continues to allow companies to land and ultimately expand valuable customer relationships.
Source: Financial results briefing materials
competitive advantage
ServiceNow is the market leader in the IT Service Management (“ITSM”) tools market, with over 51% market share in 2019, according to Gartner, significantly higher than its closest peers. The ServiceNow platform has been a disruptor in his ITSM space and has continued to gain market share from traditional players such as BMC since his IPO in 2012 when it had just 10% market share. Competition also comes from new market entrants such as Micro Focus, Freshworks and IBM (IBM). But keep in mind that ServiceNow’s product is much better and has a much broader scope. For example, ServiceNow is Gartner’s Magic His quadrant for ITSM Tools, and in 2019 he was named a leader for the sixth year in a row.
(Image source: Gartner)
Additionally, ServiceNow will face new competition as it explores newer areas of human resources and customer service workflow services. It will inevitably face competition from other his SaaS companies operating in these areas, for example, Splunk (SPLK) for dashboards and Zendesk (ZEN) for the customer engagement marketplace. However, with its advanced integration capabilities, superior platform infrastructure, and continued innovation, we believe ServiceNow is well-positioned to make its presence felt in new areas.
Also very important from a competitive perspective, high switching costs give ServiceNow revenue and cash flow “stickiness”. For example, large direct costs (such as the time and money associated with new software) and indirect costs (such as lost productivity while users gain expertise) can lead customers to move to another service provider. It becomes very difficult. ). This phenomenon is also reflected in ServiceNow’s 97% renewal rate. Additionally, the following customer cohort chart helps illustrate NOW’s fixed customer and growing relationships.
(Image source: presentation for investors)
And importantly, this persistence is especially valuable during difficult economic times.
Large market to serve
With the globalization of organizations and increasing competition, operational efficiency has become a major focus for enterprises. The operational friction within large companies that use traditional workflow his mechanisms is more evident in the current scenario given the business disruptions and social distancing. Digital transformation and automation of day-to-day workflows are always required to achieve operational efficiency, so executives can focus on protecting revenue and ensuring business resilience. According to ServiceNow management, the market size the company can serve is expected to reach $110 billion in 2018 and $165 billion by 2023, growing at a CAGR of 8%. .
(Image source: presentation for investors)
Given ServiceNow’s dominant position in IT service management, the company is in a strong position to roll out additional offerings to enterprise customers who are increasingly looking to transact with fewer vendors to increase efficiency. This large total market is another reason why NOW’s business is so valuable.
Recent performance and valuation
Not only has ServiceNow delivered significant revenue and revenue growth over the last few years through customer acquisition and upselling, but it has also benefited from an accelerated digital transformation in a post-pandemic world. We have achieved results that exceed expectations. For example, ServiceNow reported subscription revenue of $1.02 billion in his Q2 2020. This represents a staggering 30% year-over-year growth rate. And this strong growth is largely due to increased purchases from existing customers and the onboarding of additional customers. Specifically, in the past 12 months, the company has added 200 new customers with annual contract value over $1 million, 40 of which were onboarded in Q2 2020 itself, with over $10 million2 contains one transaction.
Data Source: Company Data
ServiceNow has reported tremendous growth in recent years with continuous innovation and product additions, growing at a CAGR of over 36% between 2015 and 2019. And while the annual growth rate has slowed slightly in recent quarters, it’s still growing 28% year-over-year. As a market leader it remains very healthy and attractive.
From a valuation standpoint, ServiceNow recently traded just over 16 times its projected one-year future sales.
(Image source: YCharts)
And in contrast to some Wall Street analysts, the metric compares favorably with the company’s high growth rates, industry leadership position, and very large, long-term viable market overall. In our view, ServiceNow is expensive, but it’s worth it.
risk
While ServiceNow’s business has many attractive attributes, there are risk factors that investors should consider. For example, NOW competes in a highly competitive market, and even though the company enjoys many competitive advantages (product, size, leadership position, etc.), the industry is subject to change, especially New competition is always a threat if NOW cannot continue to innovate. Current high rate.
Technically speaking, another risk factor is the argument that the stock has risen so quickly that a technical sale is on the horizon. Some investors feel this week’s surge in market volatility in tech stocks points to near-term challenges. In our view, the timing of short-term market moves has more pitfalls than value, and a much better approach is to simply buy really good companies and take a bumpy but ultimately sharp turn. It’s about sticking to long-term rides that go up.
The COVID-19 pandemic also poses risks to businesses. NOW, a cloud-based company and organization whose employees recently allowed employees to work from home, has been less affected by the pandemic than other organizations. However, the severe and long-term economic damage caused by the virus can have a significant negative impact on your business.
ServiceNow initial focus
For your reference, please see the First Focus report included below for more ServiceNow views.
