ServiceNow stock analysis.
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Back in 2003, entrepreneur Fred Luddy felt there was a disconnect between business teams and IT departments. Luddy set up ServiceNow to bridge that gap. It’s software helps businesses streamline and ultimately replace IT systems.
The business has been an incredible success and today the company is valued at 115 billion dollars. With 7.2 billion of cash and investments and 1.5 billion of debt, the enterprise value is 109 billion.
Revenue over the last 12 months is 7.6 billion, net income is 400 million with 2.1 billion of free cash flow. 96% of ServiceNow revenue comes through recurring subscriptions and the company has strong gross margins of 78%.
And ServiceNow boasts several other attractive qualities. Its products are used by 80% of the Fortune 500, with a 98% renewal rate and 125% net expansion rate. As seen by the chart, ServiceNow does an excellent job of keeping customers and generating incremental revenue from each one.
In addition, ServiceNow stock has been outstanding, providing almost 35% annualized returns over the last 5 years. Software investors often talk about the rule of 40 but ServiceNow claims it occupies the rule of 60 since it previously posted 30% revenue growth and 32% free cash flow margin.
To be fair, last year’s revenue growth dropped to 23% and revenue growth rates have been declining steadily over time.
But ServiceNow management is optimistic. Its revenue target for 2026 was upgraded from 15 billion to 16 billion and management believes its software can now be expanded across other company departments such as sales, legal and human resources. In addition, ServiceNow has plans to grow in international markets.
#servicenowstock #investing #stocks #stockstobuy
Visit our website for more: https://www.overlookedalpha.com
Back in 2003, entrepreneur Fred Luddy felt there was a disconnect between business teams and IT departments. Luddy set up ServiceNow to bridge that gap. It’s software helps businesses streamline and ultimately replace IT systems.
The business has been an incredible success and today the company is valued at 115 billion dollars. With 7.2 billion of cash and investments and 1.5 billion of debt, the enterprise value is 109 billion.
Revenue over the last 12 months is 7.6 billion, net income is 400 million with 2.1 billion of free cash flow. 96% of ServiceNow revenue comes through recurring subscriptions and the company has strong gross margins of 78%.
And ServiceNow boasts several other attractive qualities. Its products are used by 80% of the Fortune 500, with a 98% renewal rate and 125% net expansion rate. As seen by the chart, ServiceNow does an excellent job of keeping customers and generating incremental revenue from each one.
In addition, ServiceNow stock has been outstanding, providing almost 35% annualized returns over the last 5 years. Software investors often talk about the rule of 40 but ServiceNow claims it occupies the rule of 60 since it previously posted 30% revenue growth and 32% free cash flow margin.
To be fair, last year’s revenue growth dropped to 23% and revenue growth rates have been declining steadily over time.
But ServiceNow management is optimistic. Its revenue target for 2026 was upgraded from 15 billion to 16 billion and management believes its software can now be expanded across other company departments such as sales, legal and human resources. In addition, ServiceNow has plans to grow in international markets.
#servicenowstock #investing #stocks #stockstobuy
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NewsTranscript
00:00 Back in 2003 entrepreneur Fred Luddy felt there was a disconnect between business teams
00:05 and IT departments. Luddy set up ServiceNow to bridge that gap. Its software helps businesses
00:12 streamline and ultimately replace IT systems. The business has been an incredible success and
00:18 today the company is valued at $115 billion. With $7.2 billion of cash and investments
00:24 and $1.5 billion of debt, the enterprise value is $109 billion. Revenue over the last 12 months is
00:30 $7.6 billion. Net income is $400 million with $2.1 billion of free cash flow. 96% of ServiceNow
00:38 revenue comes through recurring subscriptions and the company has strong gross margins of 78%.
00:43 And ServiceNow boasts several other attractive qualities. Its products are used by 80% of the
00:50 Fortune 500 with a 98% renewal rate and a 125% net expansion rate. As seen by the chart, ServiceNow
00:58 does an excellent job of keeping customers and generating incremental revenue from each one.
01:03 In addition, ServiceNow's stock has been outstanding, providing almost 30% returns over
01:09 the last 5 years. Software investors often talk about the rule of 40, but ServiceNow
01:14 claims it occupies the rule of 60, since it previously posted 30% revenue growth and 32%
01:20 free cash flow margin. To be fair, last year's revenue growth dropped to 23% and revenue growth
01:27 rates have been declining steadily over time. But ServiceNow management is optimistic.
01:32 Its revenue target for 2026 was upgraded from $15 billion to $16 billion and management believes
01:38 its software can now be expanded across other company departments such as sales, legal and
01:43 human resources. ServiceNow has plans to grow in international markets as well.
01:48 This is clearly a quality business. The real issue right now is the valuation.
01:52 After a 45% rally, the stock trades at 14 times revenue, 290 times earnings and 52 times free
02:00 cash flow. That makes it one of the most expensive stocks on the market. That said,
02:04 ServiceNow is currently spending 40% of revenue on sales and marketing. As the company matures,
02:09 it will be able to reduce that spend and generate higher earnings.
02:13 Let's assume that ServiceNow hits its target of $16 billion revenue in 2026 and then continues
02:19 to grow at a rate of 15% a year. A 25% net income margin puts net income around $11 billion in 10
02:26 years time. And a 30 times multiple takes that valuation to $330 billion. That works out to an
02:32 investment return of 11.7% per year. That return sounds a little low, but even so, it's hard to
02:38 bet against this company. ServiceNow has got to where it is today without any major acquisitions.
02:43 It's got sticky products and its future cash flows can be used to buy back more of the company's
02:48 stock, juicing returns. It would be nice to get the stock a little cheaper, but right now I give
02:53 it a solid bullish rating. But these are my personal opinions, not financial advice. And I
02:58 do own shares in ServiceNow. For more detailed investing ideas, make sure to visit our website,
03:03 OverlookedAlpha.com.