ServiceNow, Inc. (NYSE: NOW)
Trending stock of the day.
ServiceNow is a Santa Clara, California-based American software firm that creates a cloud computing platform to assist businesses in managing digital processes for enterprise operations. The company's software products help customers streamline workflows, find and fix inefficiencies in those workflows, and connect various departments throughout an organization so that informed decisions are made. ServiceNow's customers range from tech development to human resources departments. Having recently announced a partnership with Nvidia, the company has seen an increase in mentions by over 146% over the last day, prompting investors to wonder what makes ServiceNow gain such hype. Currently, shares of ServiceNow trade at $538.40.
Positive Hype
ServiceNow has made a lot of very interesting announcements lately, a majority of which have promised success. Here are some reasons that this has generated positive hype.
ServiceNow just laid out a new partnership with Nvidia to drive better workflow management software for the enterprise. The company can use Nvidia’s technology to develop custom large-language models to extend productive new functionality across the enterprise.
The company has $7.6 billion in revenue over the last reported 12-month period -- more than double trailing-12-month sales at the beginning of 2020.
Over the past five years, ServiceNow stock is trading up 193% compared to the S&P 500's total return of 69%, which doesn’t come as a surprise considering how sticky ServiceNow's products are with its clients.
The business's renewal rate is routinely above 97%, and its established customers on average spend more with it over time.
ServiceNow is expecting to grow its subscription revenue by about 23.5% year over year, all the while generating a very healthy free-cash-flow profit margin of 30%.
The software-as-a-service (SaaS) stock also announced its first-ever share repurchase authorization, allocating $1.5 billion to buy back stock, primarily to offset the diluting effect of stock-based compensation.
Negative Hype
No investment is free of downsides, and ServiceNow is no exception. Here are some reasons that the company may have generated negative hype.
ServiceNow's stock doesn't come cheap. Shares trade for 261 times trailing-12-month earnings (or 49 times trailing 12-month free cash flow), and 54 times expected fiscal-year 2023 earnings per share.
The company dialed down its 2024 subscription revenue target from $11 billion to $10.4 billion due to macroeconomic and currency headwinds, but investors seemed to look past that given its investments in AI and new product development.
Conclusion
After years of fast expansion, this business is starting to scale to profitability based on generally accepted accounting principles (GAAP), which helps explain the high valuation. Nevertheless, despite economic headwinds and ongoing negative effects from currency exchange rates, ServiceNow is expecting to grow its subscription revenue while also generating a very healthy free-cash-flow profit margin.
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