ServiceNow, Inc. (NOW) is down more than 15% this year on the broader technology downturn, as higher fossil fuel prices pushed the market toward energy companies and away from high growth stocks.
However, once the market shakes off its near-term volatility, ServiceNow should recover as it operates in a fast-growing market. Thus, I am bullish on this stock.
Before buying shares, I would wait for the market to create more convenient entry points, which is possible with a 14-day Relative Strength Index of 45 and the long-term nature of the current headwinds for technology stocks.
The 14-Day Relative Strength Index indicates whether stocks tend to be overbought or oversold after a sharp rise or fall. The ratio is between 30 and 70. So the value of 45 suggests that ServiceNow is still far from oversold despite the significant downtrend.
Company Details
ServiceNow operates a cloud computing platform that supports businesses which need help managing digital workflows and business processes.
Its clients are public organizations and companies active in various sectors, including financial services, healthcare and telecommunications. The company also serves manufacturing firms, other technology companies, oil and gas operators, and entities in the education and consumer goods industries.
FY and Q4 2021 Results
ServiceNow had a strong final three-month period of 2021 in terms of higher sales and earnings, thanks to a robust increase in demand for its platform services.
Pro forma earnings were $1.46 per share, up 25% from the year-ago quarter, beating average analyst estimates by $0.03.
Revenue came in at $1.61 billion, up nearly 31% from the year-ago quarter and beating analysts’ median forecast by $10 million.
The positive development of the quarter was sealed by significant increases in the following items (percentages refer to year-on-year comparisons):
• Subscription revenue increased approximately 30% to $1.52 billion. These will be reported as sales over the next 12 months of operations.
• Approximately 30% increase in current remaining performance obligations (RPO) to $5.7 billion. RPO is the sum of amounts invoiced and amounts to be invoiced under a contract with a customer.
• Approximately 54% increase in the volume of transactions (these were 135 as of Q4 2021) for a net new annual contract value of more than $1 million.
The company also reported the following results for the full year 2021:
Total revenue was $5.9 billion, a 30% increase over full-year 2020, while earnings per diluted share were $1.13, a 91.5% increase over 2020.
Subscription revenue (up 30% year-over-year) represented 93.2% of total revenue, while professional services and other (up 39%) contributed 6.8% of total revenue.
The Company Guidance for Q1 and FY 2022
For the first quarter, the company expects subscription revenue to be between $1.61 billion and $1.62 billion, and it also expects the current RPO to increase 29.5% over the prior-year first quarter.
For the full year of 2022, the company expects subscription revenue to be between $7.02 billion and $7.04 billion.
Wall Street Analysts Estimate Earnings Growth
Sell-side analysts on Wall Street estimate that ServiceNow’s earnings per share will move up by 24.3% this year (from 2021), increase by 26.60% in 2023 (from 2022) and increase by 26.10% annually from 2023 through 2027.
The Balance Sheet
The balance sheet of ServiceNow is solid. As of Dec. 30, 2021, it boasted showing $3.3 billion in cash, while the total debt was 1.5-fold lower at $9.77 billion.
The interest coverage ratio of 5 indicates the company can easily pay interest on outstanding debt. The ratio should be at least 1.5.
However, investors should know that ServiceNow’s weighted average cost of capital of 8.61% compared to a return on invested capital of 2.88% shows that the investment generates lower returns than the cost of raising the capital to support its finance.
This means that unless the company reverses the trend, the company’s profitability and financial condition will deteriorate.
Relying on higher debt to fund operations, assuming the company commits to it, could be a bigger problem than it is today.
As the US Federal Reserve tightens credit conditions to curb the rapid rise in inflation, the cost of borrowing is bound to rise.
Although, ServiceNow’s investments are likely to pay off since they’re in fast-growing markets.
Outlook
The strongly positive trend in customer demand for ServiceNow’s innovative platform, coupled with expectations that the market size of business analytics and enterprise software will double in a few years, puts ServiceNow on a good path to become more efficient.
In addition to enjoying a solid reputation as a workflow partner in the global arena, ServiceNow makes strategic investments in sub-sectors recognized as key drivers of business analytics and enterprise software markets around the world.
These include investments in ERP (Enterprise Resource Planning) migration services, software testing automation, and strengthening the platform’s financial and tax services. Also, a strategic alliance with KPMG to help clients educate on environmental, social and governance (ESG) and to improve resilience to financial and cybercrime risks while promoting digitalization.
The global business analytics and enterprise software market is projected to reach $694 billion by 2026, growing at a CAGR of approximately 14.5% during the forecast period 2021-2026.
The growth is attributed to the increasing adoption of cloud-based services and other cutting-edge technologies in the above subsectors where ServiceNow is investing.
Wall Street’s Take
For the past three months, twenty-one Wall Street analysts have issued a 12-month price target for NOW. The company has a Strong Buy consensus rating based on 18 Buys, two Holds, and one Sell rating.
The average ServiceNow price target is $674.24, implying a 32.90% upside potential.
Conclusion
As the market grows and the company fuels fire on all cylinders, it should help generate a higher return on any investment.
ServiceNow says it is on track to become a company generating more than $15 billion in annual revenue, up 2.5 times from 2021. The stock price is strongly poised for a rebound, but the market needs to regain interest in technology stocks and ServiceNow.
Discover new investment ideas with data you can trust
Read full Disclaimer & Disclosure
