ServiceNow (NYSE:NOW), originally built to handle digital workflows, has become the hottest cloud services application company. NOW stock is trading about 8% off its month-ago high.
ServiceNow opened for trade Jan. 13 at over $513 a share, a market cap of $100 billion, with an eye-popping price-to-earnings ratio of 147. That’s also about 22 times its estimated 2020 revenue of $4.4 billion.
Betting on McDermott
Before jumping to ServiceNow, McDermott had helped SAP’s value rise from $39 billion to $156 billion. (It’s now $153 billion.) McDermott grew up in Amityville, on Long Island, a few miles from this writer. He has worn sunglasses since a 2015 fall cost him his left eye.
McDermott says he left SAP after it became apparent cloud was a better place to be in than database tools. SAP had long been splitting the database market with Oracle (NASDAQ:ORCL), which has lately been proclaiming itself a cloud company. McDermott was briefly president of Gartner (NYSE:IT) before getting into database applications with Siebel Systems, now part of Oracle, in 2002.
Like Netflix (NASDAQ:NFLX) and other early cloud companies, ServiceNow began as an Amazon (NASDAQ:AMZN) Web Services application. It now uses Microsoft (NASDAQ:MSFT) and Alphabet’s (NASDAQ:GOOGL) Google Cloud as well, while spinning up its own private cloud platform. In this, its strategy is akin to Salesforce.
Its niche is powerful because ServiceNow is cloud software for developing cloud software. Its 2020 growth rate should be about 27%, and revenues have tripled since 2016.
Companies that began as ServiceNow service bureaus, such as upstate New York’s Linium, are now being bought by Fortune 500 companies like Cognizant (NASDAQ:CTSH). Over 30 ServiceNow partners have been acquired since 2015.
McDermott calls companies like SAP “cement makers.” He doesn’t see them as competitors, but as “systems of record” on which applications from ServiceNow are built. ServiceNow might be likened to a building contractor.
In 2020 ServiceNow focused on COVID-19 and things like return-to-work systems. Now it’s focused on “experiences” as McDermott says, “everything has to be done in the cloud.”
Talk like that has analysts calling ServiceNow “the next big name” in enterprise cloud. Of 23 analysts following NOW stock, Tipranks shows 21 have it on their buy lists. The average price target of $595 is 16% ahead of where it is now. Bulls say its subscription model creates earnings visibility. They say companies with subscription growth outperform the market; we’re still in the early innings of the model.
ServiceNow’s powerful stock lets it make bigger acquisitions. Its most recent is Element AI, a Canadian developer of AI applications co-founded by 2018 Turing Award winner Yoshua Bengio. I met Bengio at the 2019 Heidelberg Laureate Forum, before he hit the jackpot. He teaches at the University of Montreal.
The Bottom Line on NOW Stock
ServiceNow is one of those companies that have nowhere to go but up. If you have a 10-year time horizon and are seeking capital gains, you can buy NOW stock with confidence.
Salesforce sported a PE of over 100x back in 2016. It has backed off that level as it has grown. It’s still four times larger than ServiceNow.
Thus, while I question the market’s valuation, I can’t argue ServiceNow is overpriced relative to it. You can wait for it to fall. But I waited for years before buying Salesforce and missed out on its big move.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at firstname.lastname@example.org, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/. At the time of publication, Dana owned shares in CRM, MSFT and AMZN.