ServiceNow: Moving From Large Cap To Mega Cap, Now

seekingalpha07-06

I remain bullish on ServiceNow, Inc. stock due to its impressive outlook for 2024, showcasing robust revenue growth.I see a path for ServiceNow's free cash flow margin to expand further in 2025.I am ...

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(NYSE:NOW) has a lot going for it. The punchline here is that paying 37x next year's free cash flow for ServiceNow is an entirely justifiable multiple. This is a large cap, on the path towards being a mega-cap. Investors are not going to find this type of stock on sale. ServiceNow is a company with strong prospects, that offers investors peace of mind. And that comes at a high price. Add to this the fact that it is still growing at more than 20% CAGR on the topline, plus having a strong financial position, with a net cash balance sheet, and suddenly, it becomes apparent that this stock's prospects are undervalued. Rapid Recap Back in early February, I said, [...] my bullish stance on ServiceNow remains unwavering. The company's impressive outlook for 2024, showcasing robust revenue growth and enhanced free cash flow margin, aligns with its strong performance in 2023.   Author's work on NOW ServiceNow is a stock that I've been unwaveringly bullish on for a while. What's more, as you can see above, my recommendation has nicely outperformed the S&P 500 (SP500). And now, as I look ahead, I reaffirm my bullish stance. Why ServiceNow? Why Now? ServiceNow focuses on providing digital workflow solutions to help organizations improve their operational efficiency and customer service. Their platform integrates various functions, including IT Service Management, IT Operations Management, and human resources. With a diverse customer base that includes major corporations and government entities globally, ServiceNow is solidifying its role as a critical partner for business transformation. In the near term, ServiceNow’s prospects are driven by strategic partnerships. The rapid adoption of their generative AI solutions, such as Now Assist AI, is a significant growth driver, evidenced by record-breaking sales of Pro Plus. High-profile collaborations with tech giants like Microsoft (MSFT) and IBM (IBM) further enhance their market reach. Yet, ServiceNow also faces headwinds. As we'll soon discuss, the macro environment has been challenging, which has impacted IT spending and prolonged sales cycles. Additionally, the market for enterprise AI solutions is becoming increasingly competitive, with numerous players vying for market share. For example, one of ServiceNow’s major competitors is Salesforce (CRM), a leader in customer relationship management software. Both companies compete in the enterprise software sector, particularly in the areas of workflow automation and AI-driven solutions. While ServiceNow excels in IT service management and operational workflows, Salesforce’s strength lies in its comprehensive CRM capabilities and extensive ecosystem. Given this balanced background, let's now discuss its fundamentals. Revenue Growth Rates Point to Approximately 23% CAGR in 2024 NOW revenue growth rates The backdrop for the market of late has seen a slight uptick of SaaS names, after the market got substantially disenchanted with these names for several months in 2024. The graphic that follows looks rather busy, but I'll go through and explain some observations. Data by YCharts Don't worry so much whether the share price is up or down. Instead, observe how these companies' share prices have started to increase in the past few weeks. This is an interesting setup. Why? Here, let's discuss ServiceNow. Allow me to remind you of what I said back in February about ServiceNow's guidance. When a SaaS-enterprise servicing company generates more than $11 billion in revenues as a forward run-rate is growing at close to 25% CAGR, there's a lot of potential blemishes that can be forgiven. This was the reasoning that undoubtedly many had about ServiceNow. When ServiceNow failed to raise their revenue growth rates for full year 2024, when they reported their Q1 2024 results, the stock to take a breather. After all, investors have been paying a large premium for ServiceNow on the assumption that they would sprinkle investors with a steady dose of good news, in the form of a stronger revenue outlook. But when this didn't take place, investors became apathetic. But I believe that in time, like a pendulum, investors' sentiment will swing back, and be highly supportive of this sort of business. After all, I follow many companies and I don't know of many that are eyeing up $15 billion of revenues in less than 2 years, and expecting to grow at approximately to 20% CAGR. NOW investor presentation Given this context, let's now discuss its valuation. NOW Stock Valuation -- 37x Next Year's Free Cash Flow ServiceNow is a highly profitable business. Plus, crucially, it holds approximately $3.5 billion of net cash. Therefore, this business has significant wherewithal to withstand a lot of turbulence and uncertainty. This consideration, together with the fact that it delivers premium-growth, supports a premium valuation. Note, premium-growth means a business that can be counted on to deliver +20% revenue growth rates at scale. Indeed, this supports a premium valuation on its stock. Supposing ServiceNow can expand its free cash flow margin by 100 basis points next year, to 32%, this would see ServiceNow delivering approximately $4.3 billion in free cash flow. This means that ServiceNow, with its strong and stable growth rates in the low to mid-20% range, is priced at 37x next year's free cash flow. This is a very compelling valuation. The Bottom Line In sum, reflecting on ServiceNow's future prospects, I remain confident in its trajectory. The company is not just meeting but exceeding expectations, with impressive revenue growth and a strong financial position. Despite a challenging economic environment and fierce competition, ServiceNow continues to take market share.  With a firm belief in its potential, I look forward to seeing how ServiceNow continues to transform business workflows and drive efficiency. Overall, it's clear: the future of work is happening \"NOW.\"","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.28.3","shortVersion":"4.28.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2449214370"}