ServiceNow is Like a Younger Salesforce.com

Stock (Symbol)

ServiceNow (NOW)

Stock Price

$110

Sector

Technology

Data is as of

August 22, 2017

Expected to Report

Oct 24

Company Description

ServiceNow, Inc. is provider of enterprise cloud computing solutions that define, structure, manage and automate services for global enterprises. The Company offers a set of cloud-based services that automate workflow within and between departments in an enterprise. It provides workflow solutions, and focuses on service management for customer support, human resources, security operations and other enterprise departments. Source: Thomson Financial

Sharek’s Take

ServiceNow (NOW) is one of the fastest growing software stocks to own, and reminds me a lot of Salesforce.com. ServiceNow is a cloud-based provider of software to businesses, and does so on a subscription basis. When it began in 2004, the company started with IT help-desk software then expanded into customer service, and is now developing a slew of other apps in HR and security. ServiceNow had a renewal rate of 97% last qtr with 400 customers doing more than $1 million in average contract values. The company is a competitor to Salesforce, but NOW is growing faster with profits up 70% or so the last 2 years, double Salesforce’s. This stock has a P/E of 94, yet is on a steady upward trend so investors don’t seem to mind. Salesforce had a high P/E like this years ago, and proved to be a good buy in retrospect. Service now is growing sales and billings in the 35-38% range. NOW is in the middle of my 2017 and 2018 Fair Values of $88 and $134. I feel the stock is traveling towards $134, but the high P/E makes the stock risky. Especially if the market sells off. We are entering September, a historically poor month for the stock market, thus I will pass on NOW for now, and wait to buy-in if we get a pullback.

One Year Chart

ServiceNow didn’t beat the street as it had 2QtrsAgo. 2Qtrs ago it made $0.24 and beat by 7 cents. Last qtr it made $0.22 and beat by 2 cents. Note the profit growth rate slowed considerably. Also, thi sqtr NextQtr’s est declined 3 cents to $0.32. Overall NOW was making around 15 cents teens a year ago, it’s making around 23 cents now, and is expected to make an average of 36 cents the next 4 qtrs with Estimates of 39% , 63%, 46% and 68%. 2017 profit estimates only increased a penny this qtr from $1.16 to $1.17. The Est. LTG just increased from 40% to 51% per year which is excellent.

Fair Value

So NOW has a high P/E now but nice upside to my 2018 Fair Value of 75x earnings. Next qtr I will start to look ahead to 2018/2019 as we will be in the last qtr of the year. My 2019 Fair Value is currently $207.

Bottom Line

ServiceNow is one of the world’s top software companies. Since the company is young, it’s growing rapidly and has a high valuation. In cases like that there’s risk of buying high as a market correction or change in the sectors outlook can lead to a big decline. NOW is one of the top five stocks I have on the radar right now, and I’m eager to invest. But I want to proceed with caution and wait for a correction.