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ServiceNow Strategy Heads ‘Into the Weeds’ as NOW Stock Hits Cheap Zone

Compared with other cloud application high-flyers, ServiceNow (NYSE:NOW) has become a cheap stock. NOW stock closed on Friday at $460.65 a share, down 18.1% since late April’s earnings report.

a man taps a digital image of a cloud with his finger
Source: Shutterstock

At that June 4 closing price, it’s worth $90.95 billion. That’s almost 19 times last year’s revenue of $4.8 billion, which sounds dear. But more-nimble rivals like Twilio (NYSE:TWLO) now sell for over 25 times revenue.

Market cap is the fuel for growth. The greater a company’s market cap, the more growth it can buy, and the less it pays for it. CEO Bill McDermott knows this from his days running SAP (NYSE:SAP). You need excitement about the future to get the stock price moving.

Instead, ServiceNow shares are down since announcing non-GAAP net income of $306 million, $1.52 a share, and revenue of $1.36 billion for the March quarter. A May 10 “Investor Day” presentation failed to move the needle.

New Strategy to Drive NOW Stock

McDermott’s new strategy is focused on getting into the weeds of corporate computing.

It’s buying Lightstep, which works on application monitoring. The company has launched a “virtual war room” with Microsoft (NASDAQ:MSFT) to deal with ransomware attacks.

At its KnowledgeNow conference, management talked about bridging a gap between IT Service Management (ITSM) and the development of applications, or DevOps. The leap into performance monitoring left analysts cold.

The move from building applications to operations management isn’t sexy. Cybersecurity, while important, seems to be a defensive strategy. This is especially true when the companies drawn to the strategy are like Siemens Energy. They signed a collaboration agreement with ServiceNow after the Colonial Pipeline ransomware attack.

What, some may ask, is McDermott up to?

Grabbing Share of Post-Pandemic Workplace

Chief Information Officer Chris Bedi hinted at it when talking about the post-pandemic workplace.

Management is going into the cloud, just as development has. The office is wherever people happen to be. Anyone who thinks the 2019 commute is coming back, with all its costs in rent, gas and fancy clothing, is fooling themselves. The traditional functions of an office, as the place where work happened or managers made sure it did, are no longer relevant, McDermott said. Today the office is a collaboration space, where managers and workers can be refreshed and refocused.

If the cloud is where business happens, then managing your cloud operations is your business. That’s the point of the company’s latest ad, with Willy Wonka, which left most observers (including me) cold.

The problem is that, for most analysts, a company saying you’re going to get into the weeds of managing operations sounds boring. It doesn’t sound like a growth strategy, even if it is one.

Analysts haven’t given up on ServiceNow. Almost all the 19 analysts following the company as tracked by TipRanks have the buy light lit. Their average one-year price target is $610, 32% higher than where it’s now trading.

The Bottom Line

What Wall Street wants from McDermott is a big, sexy, game-changing deal. That’s not how he plays.

As a result shares in ServiceNow are down more than 16% in 2021 while Salesforce.com (NYSE:CRM), which has done a big sexy deal in buying Slack Technologies (NYSE:WORK), is up 6.7%. That’s still below the 13.2% average gain in the S&P 500 index, fueled by re-opening plays in manufacturing, travel and services.

I freely admit this move burned me. I chose to close out a position in Salesforce for ServiceNow in January and I’m down 8%.

But as I’ve written here many times, I’m not a speculator. I’m an investor. I don’t chase shiny objects. I put money into well-run companies and make time my ally. It will take time to see if McDermott’s new “in the weeds” strategy pays off. I’m willing to give it time.

On the date of publication, Dana Blankenhorn held LONG positions in NOW and MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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 danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack newsletter.


Article printed from InvestorPlace Media, https://investorplace.com/2021/06/servicenow-strategy-heads-into-the-weeds-as-now-stock-hits-cheap-zone/.

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