$ServiceNow(NOW)$ Growth investors focus on stocks that are seeing above-average financial growth, as this feature helps these securities garner the market's attention and deliver solid returns. However, it isn't easy to find a great growth stock.
In addition to volatility, these stocks carry above-average risk by their very nature. Also, one could end up losing from a stock whose growth story is actually over or nearing its end.
However, it's pretty easy to find cutting-edge growth stocks with the help of the Growth Style Score, which looks beyond the traditional growth attributes to analyze a company's real growth prospects.
ServiceNow is one such stock that our proprietary system currently recommends. The company not only has a favorable Growth Score, but also carries a top Rank.
Research shows that stocks carrying the best growth features consistently beat the market.
While there are numerous reasons why the stock of this maker of software that automates companies' technology operations is a great growth pick right now, we have highlighted three of the most important factors below:
Earnings Growth
Earnings growth is arguably the most important factor, as stocks exhibiting exceptionally surging profit levels tend to attract the attention of most investors. And for growth investors, double-digit earnings growth is definitely preferable, and often an indication of strong prospects (and stock price gains) for the company under consideration.
While the historical EPS growth rate for ServiceNow is 54.5%, investors should actually focus on the projected growth. The company's EPS is expected to grow 28.1% this year, crushing the industry average, which calls for EPS growth of 7.7%.
Cash Flow Growth
Cash is the lifeblood of any business, but higher-than-average cash flow growth is more beneficial and important for growth-oriented companies than for mature companies. That's because, high cash accumulation enables these companies to undertake new projects without raising expensive outside funds.
Right now, year-over-year cash flow growth for ServiceNow is 33%, which is higher than many of its peers. In fact, the rate compares to the industry average of -13.1%.
While investors should actually consider the current cash flow growth, it's worth taking a look at the historical rate too for putting the current reading into proper perspective. The company's annualized cash flow growth rate has been 33.5% over the past 3-5 years versus the industry average of 9.1%.
Promising Earnings Estimate Revisions
Superiority of a stock in terms of the metrics outlined above can be further validated by looking at the trend in earnings estimate revisions. A positive trend is of course favorable here. Empirical research shows that there is a strong correlation between trends in earnings estimate revisions and near-term stock price movements.
The current-year earnings estimates for ServiceNow have been revising upward. The Zacks Consensus Estimate for the current year has surged 5.2% over the past month.
Bottom Line
This combination indicates that ServiceNow is a potential outperformer and a solid choice for growth investors.
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