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About ServiceNow
Although it may have the initial appearance of being the words spoken by a hungry barbarian at an Applebee’s, close but no cigar.
ServiceNow is a prominent software company that predominantly serves enterprise customers (i.e., businesses that consistently perform software and/or data-driven projects) by providing a cloud computing platform through which its users can use to manage its digital workflows.
In essence, it takes what have been historically strenuous, stressful and tedious tasks and automates, optimizes and subsequently simplifies said operations.
ServiceNow delivers efficiency for its clients across the board.
If that still isn’t ringing any bells, it can be thought of as a rather large information technology (IT) company that helps companies and organizations such as Coca-Cola, Delta, Amazon.com, Apple, Walmart, Standard Chartered, Zoom, Deloitte, Interstate Batteries, KPMG, the National Basketball Association (NBA) and the Women’s National Basketball Association (WNBA) along with a long string of other high-profile clients that use the company’s platform and its associated services.
How does ServiceNow generate revenue, one might ask.
Well, as is the case with a slew of other software as a service (SaaS) companies, the company generates the vast majority of its revenues through a subscription-based model, charging those who opt to use its platform a periodic fee, which likely varies per client, perhaps based on monthly or annual consumption in certain cases.
Given the general scope of the work that ServiceNow helps its clients optimize and perform, it seems as though the company is a great partner to have as society journeys deeper and deeper into a cloud-based, technology-driven world.
Even though this is the case and ServiceNow seemingly has a lot to gain from these macro trends, it would serve us best to become a bit more informed of the company’s stock and its core, underlying financials so as to see whether or not its stock (NYSE: NOW) is worth considering purchasing today.
ServiceNow’s stock financials
Trading at a share price of $465 while maintaining a price-to-earnings (P/E) ratio of 296.23, a market capitalization of $93.98 billion all while not presently issuing an annual dividend to its shareholder base, ServiceNow’s stock seems a bit expensive (and by a bit expensive we mean very expensive), specifically to the tune of other technology companies we have analyzed in the past.
From our vantage point, the only way in which a price-to-earnings ratio of around fourteen times that of the fair value benchmark is if this company is growing like hotcakes.
Therefore, let’s dig deeper into ServiceNow’s financials to see if this is the case, but first, let’s briefly take a peek at the current form of the company’s balance sheet.
ServiceNow’s executive team is responsible for tending to approximately $13.3 billion in terms of total assets along with around $8.2 billion in terms of total liabilities.
Overall, the company, even as it continues to grow, has been able to stay total asset-heavy (by a notable margin, we might add) which is nothing short of impressive as it can become exceedingly difficult for growth companies to tame their total liabilities, especially when factoring in the current economic backdrop.
Onto some of the more growth-oriented figures, ServiceNow’s income statement.
Particularly, the company’s total revenue has been increasing each year over the last five years, sitting at $2.6 billion in 2018 and since scaling up to its latest reported figure (according to TD Ameritrade’s platform) of $7.2 billion.
To us, this is fantastic, steady growth, however, it still doesn’t get us out of the bed in the morning when the price-to-earnings ratio is as elevated as it currently is. While we do assume that there is certainly more growth to be had in the markets in which ServiceNow operates (not to mention new markets), the company is nevertheless maturing and paying multiples upon multiples for a company rounding the growth and maturity bend doesn’t seem like the most prudent financial decision, at least based on these still stellar recent total revenue figures.
We’re certainly not trying to take anything away from this company’s incredibly consistent revenue growth, but the present P/E multiple is still too high and isn’t objectively justified by the aforementioned figures.
Onto the company’s cash flow statement, it is worth noting that generating positive net income isn’t usually a strong suit of many SaaS companies, mature or not, as has been evidenced in previous stock analysis articles.
However, that just makes it that much more impressive since ServiceNow’s net income since 2019 has been comfortably positive, perched at $627 million in 2019, plunging to $119 million the following year (we understand this, as it is more than likely that expenses unexpectedly grew at a rapid rate and thus ate into the company’s margins, as was likely the case with other established SaaS companies), shallowly climbing to $230 million up to its latest displayed figure of $325 million.
Even though the company’s steep drop in net income in 2019 was far from ideal, it is a great sign that during the years that followed it was able to dust itself off and get back to consistently churning out sizable amounts of net income on an annual basis.
ServiceNow’s stock fundamentals
As more and more focus has been put on the Cloud, more and more competition has undoubtedly emerged.
This is likely one of the reasons ServiceNow’s trailing twelve month (TTM) net profit margin is lower than the industry’s average.
For example, the company’s TTM net profit margin is tucked away at 4.49% compared to the industry’s average of 15%, according to TD Ameritrade’s platform.
While certainly not the end of the world, make no mistake about it, this is a material difference.
Although there is definitely cause for celebration in that the company’s TTM net profit margin is positive to begin with, we’d like to see it be a lot more competitive with its peers, certainly within the next handful of years, definitely within the current decade.
Lastly, also according to TD Ameritrade’s platform, ServiceNow’s TTM returns on both assets and investment lag behind the industry’s averages as well, by again, rather large amounts.
For instance, the company’s TTM return on assets are pegged at 2.7% to the industry’s average of 10.87% as well as its TTM returns on investment sitting at 4.95% whereas the industry’s (again, on average) sits at 12.66%.
This very well could simply be a natural byproduct of growing at a rapid rate, however, to us it is just another reason that it is not currently worth paying a massive premium for at the moment. If the company’s share price were to come down considerably and trade at a better value, strong arguments could be made that picking up shares in the company’s stock would be a worthwhile endeavor.
That just doesn’t seem to be the case right now.
Should you buy ServiceNow stock?
Considering the current and future demand for Cloud-related products and services along with the company’s position in the industry, the future looks bright for companies like ServiceNow.
However, from an investor’s point of view, paying a more than substantial premium for shares in the company when we’ve likely not yet seen the worst of the current recession doesn’t seem like a very prudent move.
Buying at the top and selling at the bottom doesn’t usually work out all that well.
Kudos to the company and its executive team for developing a lean balance sheet, consistently growing total revenues and simply setting up a platform that has helped serve many of its enterprise and other organizational clients, but at the end of the day, this stock has some coming down to do before we get interested.
We give ServiceNow’s stock a “sell” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.