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Is ServiceNow's (NOW) Place in Your Portfolio Justified?

Zacks Equity Research
Updated

ServiceNow NOW has been a favorite with investors, courtesy of its strong partnerships, global presence, rising share price and strong fundamentals. Shares of ServiceNow have gained 62.8% year to date, significantly outperforming the industry’s 35.9% rally.

Let’s now delve deeper and take a look at some of the aspects aiding the company’s performance.

Key Drivers

The share price momentum can primarily be attributed to growing adoption of the company’s platform and tools by 2000 (G2K) companies, as defined by Forbes. The company is also gaining from rapid penetration into the non-ITSM markets such as customer service, human resource and security.

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ServiceNow has been a dominant name in the IT service market (“ITSM”). The company is steadily winning market share amid the ongoing trend of replacing legacy on-premise systems with cloud-based processes, especially among G2K companies. The growing penetration at G2K customer base has been driving ServiceNow’s top-line, which has been exemplary, increasing at a CAGR of more than 70% over 2009-2016 time frame.

Notably, with none of the customers exceeding 10% of revenues in the last couple of years, the customer base remains unaffected by the problem of customer concentration. Diversified clientele is another positive.

Moreover, the company’s expanding product portfolio (including emerging products) and strong renewal rate (almost 98%), are the other key catalysts. Additionally, the popularity of its Customer Service Management product, launch of a new HR product and the availability of the Jakarta platform to all is anticipated to boost performance further.

Acquisitions have also played an important part in ServiceNow’s growth trajectory over the years. The acquisitions of Neebula Systems (2014), BrightPoint Security and ITapp (both in 2016) has aided the company to expand product portfolio, particularly security and ITOM solutions. The recent buyout of DxContinuum will boost its predictive modelling capabilities, consequently expanding ServiceNow’s intelligent automation product portfolio going ahead. Also, the company's recently announced acquisition of Qlue, a developer of virtual messaging agents, is anticipated to enhance customer experience. Further, the announced acquisitions of Telepathy and SkyGiraffe are expected to enhance the company’s enterprise mobile experience.

ServiceNow has an impressive earnings surprise history. The company outpaced the Zacks Consensus Estimate in the trailing four quarters, recording a positive average earnings surprise of 18.6%.

Further, it has a long-term expected EPS growth rate of 39%.

Risk Remains

However, in spite of an improving top-line, mounting losses and stiff competition in the non-ITSM markets from established players like Oracle ORCL and salesforce.com CRM remain concerns for the company.

Zacks Rank and Key Picks

ServiceNow currently carries a Zacks Rank #3 (Hold).

A better-ranked stock in the broader technology sector is NVIDIA Corporation NVDA, which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

NVIDIA has a long-term earnings per share growth rate of 10.3%.

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With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.

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ServiceNow, Inc. (NOW) : Free Stock Analysis Report
 
Salesforce.com Inc (CRM) : Free Stock Analysis Report
 
Oracle Corporation (ORCL) : Free Stock Analysis Report
 
NVIDIA Corporation (NVDA) : Free Stock Analysis Report
 
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Zacks Investment Research