ServiceNow Stock Is a Winning Investment in a Coronavirus World

Cloud giant ServiceNow (NYSE:NOW) has been a winner on Wall Street for a long time. Over the past five years, NOW stock is up 400%.

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Thanks in part to the novel coronavirus, ServiceNow’s winning streak won’t end anytime soon.

ServiceNow provides digital workflow solutions. It is the best in the business at doing so. In a world of physical store closures and virtual offices, digital workflows become ubiquitous, and ServiceNow becomes a mission-critical platform for every big enterprise in the world.

ServiceNow has just 933 customers with average annual contract values (ACV) north of $1 million. There are more than 20,000 businesses in the U.S. with more than 500 employees.

In other words, ServiceNow is just starting on its journey. Covid-19 has accelerated that journey, and over the next several years, the company will sustain huge revenue and profit growth. This growth will power equally huge share price gains.

Big picture: Buy and hold NOW stock. This a winner, trading at a fair valuation today, with huge tailwinds and tons of upside potential.

A Winner in the ‘New Normal’

Everyone keeps talking about the “new normal.” What will the world look like after the coronavirus pandemic passes?

Some things won’t change. Some will. One of the things that will definitely change is that businesses will become increasingly digital.

Long before Covid-19 came marching into town, businesses were already migrating to the cloud for convenience, cost, security and mobility purposes. But some businesses were reluctant to pivot. That reluctance has been wiped out by the pandemic.

With that reluctance gone, the cloud revolution has runway to meaningfully accelerate, even long after the pandemic passes. Enterprises will add “employee safety” to their list of reasons to pivot to the cloud.

And by the end of the decade, I think it’s fairly likely that almost every business in the world will have some form of cloud presence.

In that world, digital workflows are ubiquitous. They are niche today … meaning that over the next decade, digital workflows will go from niche to ubiquitous.

As they do, the whole digital workflow sector will boom. So will ServiceNow, because the company is consistently labeled as offering the best, most comprehensive, all-in-one digital workflow platform in the world.

The digital workflow boom of the 2020s — sparked in part by Covid-19 — will usher in an era of sustained big growth for ServiceNow.

ServiceNow Stock Has Big Upside

ServiceNow only has 933 customers with ACVs north of $1 million today. That’s not that many. There are more than 20,000 businesses in the U.S. with more than 500 employees, and presumably, the ability to spend $1 million or more on ServiceNow.

In time, most of them will do just do that.

ServiceNow’s $1 million-plus customer base grew 30% year-over-year last quarter, including 48% $1 million-plus contract volume growth. That powered 34% revenue growth.

These big growth rates will persist for a lot longer. As digital workflows become ubiquitous and as ServiceNow becomes a mission-critical enterprise tool, the company will sustain 20%-plus customer, contract and revenue growth for at least the next five years, if not longer.

On top of that, ServiceNow runs on a highly scalable, 80%-plus gross margin software business model. Consequently, sustained 20%-plus revenue growth over the next several years will flow into 25%-plus or better profit growth.

Given these favorable growth dynamics, I see ServiceNow’s earnings per share running toward $25 by 2030 (up from $3.32 last year). Based on a 35 times forward earnings multiple — which is the medium-term average multiple for application software stocks — a reasonable 2029 price target for NOW stock is $875.

That’s more than double the current stock price. And based on a 10% annual discount rate, it implies that NOW stock is fairly valued today around $380.

Bottom Line on NOW Stock

ServiceNow was a long-term winner long before Covid-19 ever arrived. It’s even more of a winner now, in the face of a global pandemic which has accelerated the enterprise digitization trend and will make digital workflows ubiquitous over the next decade.

As that happens, NOW stock will keep powering higher.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm.  As of this writing, he did not hold a position in any of the aforementioned securities.

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