Why I Swapped Out Salesforce for ServiceNow

Recently I decided to swap out of Salesforce (NYSE:CRM) and take a flyer on ServiceNow (NYSE:NOW). So far, the bet isn’t working. CRM stock is up 4% in 2021; NOW stock is basically flat.

service now sign logo on a building

Source: Sundry Photography / Shutterstock.com

But I don’t invest in the short term. I try to look out three to five years when I buy a stock. For the part of my portfolio that’s still focused on capital gains, ServiceNow stock looks like a better bet right now.

Here’s why.

Smaller Is Better

The first reason is a lesson about numbers. Small numbers can grow faster than big ones.

During 2020, for instance, Salesforce had revenues of $17.1 billion, $3.8 billion more than in 2019. During 2020 ServiceNow had $4.5 billion in revenue, just $1 billion more than the year before. Which company grew faster? It was close, but the answer is ServiceNow.

Salesforce began by using database technology within a specific niche: customer relations management. That’s why its ticker symbol, CRM, has nothing to do with the company name. Salesforce now provides database application software across a host of business categories. Its pending purchase of Slack (NASDAQ:WORK) for $27.7 billion places it in direct competition with Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) in cloud office applications. It’s playing in the major leagues.

ServiceNow began with a similar database technology but focused on the construction and management of digital services. It has yet to move far beyond that niche. It’s still signing alliances around office applications, like Microsoft Teams. ServiceNow will control the workflow, Teams the collaboration. These are still believed to be separate at ServiceNow.

Betting on the Jockey

There’s another reason I jumped on ServiceNow beyond the way its numbers can still grow.

For tech investments, I bet on the jockey more than the horse. That used to mean buying a founder. No longer. Tim Cook didn’t found Apple (NASDAQ:AAPL) and Satya Nadella didn’t found Microsoft. What you’re looking for today is a proven manager with a vision and the skills needed to execute. Get the right jockey on a fast horse, and you’re bound to win most of the time.

That’s Bill McDermott. He’s been in database applications for two decades. He jumped to ServiceNow in 2019 from SAP (NYSE:SAP), where he was the first non-German CEO. He has forgotten more than many of his rivals know. Also, he still has some tread on his tires. He doesn’t turn 60 until August.

McDermott also knows about strategic acquisitions. His first at ServiceNow was Element AI, a Canadian developer of artificial intelligence applications co-founded by Yoshua Bengio. I met Bengio at the 2019 Heidelberg Laureate symposium. Attaching artificial intelligence structures to ServiceNow’s database-driven digital applications is, in my view, brilliant.

The Risks

There is more risk in buying a company like ServiceNow than in buying a Salesforce.

I got a taste of that when ServiceNow had some of its customer passwords hacked through its “Help the Help Desk” feature. This sent the stock down 8% in less than two weeks.

But the overall story remains intact. ServiceNow is disrupting the software industry, passing IBM (NYSE:IBM) on the cloud leader board. It is leading a workflow revolution in software, which it sells as a subscription service, a payment model I love.

The Bottom Line on NOW Stock

Smaller companies like ServiceNow carry greater risk than big ones like Salesforce. They have richer valuations. In this case it’s a price-to-sales ratio of 24, even after its recent fall, against just 11 for Salesforce.

You want to balance risks and rewards across your portfolio. On the growth side of mine, I decided ServiceNow is a better choice for me than Salesforce. I think it has more upside. But you can’t go wrong with either one.

At the time of publication, Dana Blankenhorn directly owned shares in AAPL, MSFT and NOW.

Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn 

Article printed from InvestorPlace Media, https://investorplace.com/2021/02/now-stock-why-i-swapped-out-salesforce-for-servicenow/.

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