ServiceNow operates as a Platform-as-a-service (PaaS) company. Essentially providing customers with a platform that allows them to manage applications without the complexity. The core of ServiceNow’s service is about IT operational events – specifically incident and change management.
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There are some key points with ServiceNow – on the surface, they have exceptional growth potential with an outstanding track record [1]. A key selling point of theirs in simplicity and coordination. The programs are very easy to use and maintain and they demonstrate efficiency with their products. The current technology evolution we are experiencing is ripe for ServiceNow to exploit and continue growing. Particularly in a time where customer budgets might be tight, then there is a business justification of looking in this product.
ServiceNow snapshot
When I looked at ServiceNow, I looked straight at their future growth and current financials.
- Earnings vs Savings Rate: forecast earnings growth (30.7% per year) is above the savings rate (2.2%).
- Earnings (30.7% per year) are forecast to grow faster than the US market (22.4% per year).
- Revenue vs Market: NOW’s revenue (20.6% per year) is forecast to grow faster than the US market (9.3% per year).
- Short Term Liabilities: NOW’s short-term assets ($3.3B) exceed its short-term liabilities ($2.8B).
- Long Term Liabilities: NOW’s short-term assets ($3.3B) exceed its long-term liabilities ($1.2B).
- Debt Level: debt to equity ratio (28.1%) is satisfactory.
- Reducing Debt: NOW’s debt to equity ratio has reduced from 98.9% to 28.1% over the past 5 years.
- Debt Coverage: NOW’s debt is well covered by operating cash flow (214.2%).
- Interest Coverage: NOW earns more interest than it pays, so coverage of interest payments is not a concern [1].
Double-edged sword
As we continue down this technology growth path, we are met with a double-edged sword. We want to get rid of cumbersome, tiring manual processes that can be automated – leading to inefficiencies. The more technology, the more processes we need to learn. To combat this, we essentially need technology to help us manage our… technology. A lot of products on the market do not like to play nice with each other. Having numerous products can become detrimental to the working environment. This is where ServiceNow comes in. It acts as the middle-man, the hand holder, the bridge – whatever descriptive word you want to use. This helps resources create the various workflows so the teams can become more efficient. Allowing them not to spend more time on something that should be automatic.
So, ServiceNow utilises its application and 3rd party applications in a single place. So, there is less worry about having to sign into 6 gazillion portals just to update a timesheet. It is this ability that has driven enterprise customers to ServiceNow in droves. They boast more than 6,200 global enterprise customers, including almost 80% of all Fortune 500 companies. More than 900 of those customers have contracts that pay ServiceNow more than $1 million in annual revenue. That number has grown 30% in just the past 12 months. In just the first three months of 2020, the company had 37 new transactions with more than $1 million in value, up by nearly half from its pace of growth a year ago. [2]
All this growth marries in with the dot-points above, showing that $NOW has reduced their debt and continue to grow their revenue.
Who is in charge at ServiceNow?
At the helm of this company is CEO Bill McDermott. He was at SAP, where he was the co-CEO from 2010-2014. Then CEO from then onwards until he moved across to ServiceNow. One may glance over this fact, but SAP is a massive company. 100,000 employees and north of 27 billion euros revenue in 2019. When he was in the CEO and Co-CEO roles, he helped quadruple SAPs market value ($39b > $156b). So, I am excited to see what he can do for ServiceNow. Bill was the best-paid executive of companies on the DAX. This shows he knows what he’s talking about.
Grow with your clients
NOWx is a ServiceNow product where it has essentially put the power back into the client’s hands. It acts as an incubator/idea’s lad. Allowing clients to help build the product with them now suits the users of the product. By growing and adapting at the ground level, you are getting the clients involved.
What is the downside?
Well, first – even though the want is there, sometimes the money is not. Coronavirus does have people second-guessing every dollar they spend. This would impact the bottom line for a few months to a few years. Technology is growing to a more online presence, so having the right platform that compliments your work is necessary.
As this industry becomes more prevalent in business requirements, the cloud computing service sector is going to be competitive. With these competitive standoffs, it is good to have Bill at the lead. So, with his guidance, it should weather the wild waters of cloud computing (i.e. go away SAP). With every PaaS and SaaS companies, those who have invested in them do know that they have a massive PE most of the time. So, any setbacks can set the stocks fluctuating wildly but I’m in the game for the long run – think years, not months.
The future of ServiceNow
Process automation is the next step for our technology, within our workplace. But it is not about replacing humans, there will always be human interactions. It is removing some of the unnecessary interactions that are classified as generic in nature and waste time of resources. Think about how many times do we interact with the automated process (or even chatbots) today, compared to the early 2000s.
ServiceNow does not want to sit on its laurels and it is evident by recent acquisitions in 2020, like Loom Systems, Passage AI, and Sweagle [3]
Final thoughts
ServiceNow is a solid addition to anyone’s portfolio. A strong performer with a great future in this current market. So, what do you think, are they worth having in your portfolio?
Resources
The above analysis was created with help from the following sources.
[1] https://simplywall.st/stocks/us/software/nyse-now/servicenow
[2] https://www.fool.com/premium/company/NYSE/NOW/
