ServiceNow - The Defining Enterprise Software Company of the 21st Century?

ServiceNow in a nutshell

ServiceNow, Inc. specializes in transforming digital workflows. The company aids a variety of global entities, including industries, universities, and governments, in making their workflows digital.

The core of its offerings is the Now Platform, designed to integrate systems, departments, and processes through digital workflows.

ServiceNow (NYSE: NOW) organizes its workflow applications into four key areas: technology, customer and industry, employee, and creator.

It provides IT departments with tools to manage the entire technology lifecycle in the technology sector. The focus is on revamping customer experiences and loyalty for customer and industry workflows.

Employee workflows are streamlined to simplify access to necessary services and are adaptable for work from home, office, or field. Additionally, the creator workflows allow customers to develop, test, and implement their applications using the Now Platform.

ServiceNow and AI

ServiceNow's approach to AI, particularly generative AI, enhances efficiency, automates complex tasks, and provides users with more intelligent and responsive services.

The company leverages AI to transform and streamline enterprise operations across various sectors.

ServiceNow, known for its cloud-based workflow automation and IT service management solutions, has actively incorporated Artificial Intelligence (AI), including generative AI, into its offerings.

Here are some key areas where ServiceNow is leveraging AI, particularly generative AI:

1. AI-Powered Workflow Solutions: ServiceNow integrates AI into its workflow solutions to automate complex processes. This includes using generative AI models that can predict and generate solutions for workflow optimization, enhancing efficiency, and reducing manual intervention.

2. Natural Language Processing (NLP): ServiceNow's platforms often employ NLP, a form of generative AI, to understand and interpret human language. This technology is used in their virtual agents and chatbots to provide more intuitive and compelling user interactions.

3. Predictive Analytics: Using AI and machine learning, ServiceNow offers predictive analytics that foresees potential IT and business operations issues. This predictive capability, often fueled by generative AI models, helps in proactive problem-solving.

• AI in IT Service Management (ITSM): ServiceNow's ITSM product uses AI to automate routine tasks, such as ticket routing and categorization. The generative aspect of AI here can include creating responses to IT issues or generating recommendations for IT service management.

• Custom AI Applications: Through its Now Platform, ServiceNow enables customers to create custom AI applications that suit their needs. This includes using generative AI models to develop solutions tailored to individual business processes.

• Partnerships and Acquisitions: ServiceNow has been actively forming partnerships and acquiring companies to enhance its AI capabilities. These collaborations often focus on integrating advanced AI technologies, including generative AI, into their platform.

• Research and Development in AI: ServiceNow invests in R&D to stay at the forefront of AI advancements. This includes exploring new ways to implement generative AI in business process automation and management.

NOW Stock Performance Review

ServiceNow (NYSE: NOW) has impressively weathered the storm faced by many tech stocks in recent years, where harsh valuation adjustments have been standard.

Despite numerous tech firms struggling to regain their footing amidst slower growth rates and rising interest rates, NOW has consistently demonstrated robust revenue growth and expanding profit margins, capturing the market's attention.

Early Summer Coverage and Investment Perspective

When I discussed this stock in the early summer of 2023, I recommended buying based on its reasonable valuation and the potential boost from generative AI.

That assessment still holds as the company excels, making it a standout name in the current market.

Recent Financial Highlights

NOW's recent quarter showed a 27% year-over-year (YoY) increase in subscription revenue (25% in constant currency), exceeding expectations with $2.19 billion in revenues.

The company also reported a significant 26% YoY rise in remaining performance obligations, a key indicator of future revenue growth.

Financial Health and Future Projections

ServiceNow didn't just achieve revenue growth; it also saw substantial margin expansion, with a 30% non-GAAP operating margin.

It's worth noting that NOW has been profitable GAAP-based for several years, with $242 million in GAAP net income this past quarter.

With $6.9 billion in cash and investments against $1.5 billion in debt, the company benefits from the higher interest rates through increased interest income.

Management expects up to 25% YoY subscription revenue growth in the next quarter and has raised the full-year revenue guidance.

Stock Valuation and Market Position

While the stock's valuation isn't overtly low in price-to-sales or price-to-earnings terms, it's comparable to other high-performing tech companies like Microsoft (MSFT).

Assuming +20% revenue growth, +40% long-term net margins, and a 1.5x PEG ratio (or better), my valuation model suggests a fair value a bit north of 12x sales, indicating a solid growth potential.

Potential Risks and Outlook

The most significant risk for NOW lies in its premium valuation, especially considering potential fluctuations in growth rates due to the challenging economic environment.

A slowdown in growth could lead to significant market volatility. However, any significant drop in stock price, in my view, would present an excellent buying opportunity.

BUYING THE DIP

As of writing (November 20, 2023), the stock trades around $660 after finally climbing above the long-term resistance level at 600 USD.

NOW has been the fastest company to date to reach $7B in annual revenue (28 quarters) with industry-leading Rule of 50 performance.

The ATH is a bit north of 700 USD and the next target. It's worth buying for the long run. If, during a market correction, the share price retreats close to the 600 USD level, aggressive buys are warranted.

Valuation: ServiceNow (NYSE: NOW) delivered impressive results in late October. Despite challenging economic conditions, NOW is one of the few companies achieving steady revenue growth.

Amidst a climate of rising interest rates and heightened scrutiny on IT expenditures, NOW has remarkably maintained a revenue increase of over 20% while also boosting its profit margins. The company boasts a net cash balance sheet and is poised to benefit from generative AI greatly.

Although its stock is pricier, commanding one of the highest valuations in the tech sector, I believe this premium is justified by its solid fundamental performance and robust business model.

ServiceNow - The Defining Enterprise Software Company of the 21st Century? This may well be the case and turn out to be true! ServiceNow is an integral part of my growth portfolio - a company I do not trade but keep for the long run.