Thematic evaluation
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ServiceNow, Inc. (NOW)

September 06, 2024

Compared to: Palo Alto Networks, Inc. (PANW) | CrowdStrike Holdings, Inc. (CRWD) | Technology Select Sector SPDR Fund (XLK)

Our reasoning

ServiceNow's current valuation appears slightly overvalued due to high P/E and EV/EBITDA ratios compared to peers, despite strong financial performance and market position. While the company's growth prospects and AI-driven opportunities support a premium valuation, current levels may be pricing in too much optimism, not fully accounting for potential risks such as cybersecurity threats and intense competition.

Key takeaways
  • ServiceNow is a leading provider of cloud-based workflow automation solutions, well-positioned to capitalize on the growing demand for digital transformation and AI-powered solutions.
  • The company has a strong financial position, with consistent revenue growth, high profitability, and robust cash flow generation.
  • ServiceNow's management team has a proven track record of executing on strategic plans, driving growth and profitability.
  • The company faces several risks, including cybersecurity threats, competition, and legal challenges, which investors should carefully consider.
  • ServiceNow's valuation is relatively high compared to its peers, reflecting its strong growth prospects and profitability.
  • The company's future success will depend on its ability to continue executing on its strategic priorities and effectively managing its risks.
  • ServiceNow's investment profile is characterized by high growth potential, a strong financial position, and a higher risk profile.
Overvalued
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Evaluation summary

  1. Company Overview:

    • ServiceNow is a leading provider of cloud-based workflow automation solutions, enabling digital transformation for businesses across various industries. Its core product, the Now Platform, connects workflows across an enterprise, offering a suite of applications organized into Technology, Customer and Industry, Employee, and Creator workflows.
    • ServiceNow's revenue is primarily driven by subscription fees for its Now Platform and related services. The company's target market includes large enterprises and government agencies seeking to streamline operations, improve efficiency, and enhance customer experiences through digital transformation.
    • We will be using Technology Select Sector SPDR Fund (XLK) as a benchmark for comparing ServiceNow's price performance and risk-adjusted returns. We will also be comparing ServiceNow to its industry peers, CrowdStrike Holdings, Inc. (CRWD) and Palo Alto Networks, Inc. (PANW), to assess its relative financial performance, growth potential, and risk profile.

  2. Financial Performance:

    • ServiceNow has consistently demonstrated strong revenue growth, with subscription revenue increasing by 23% year-over-year in Q2 2024. This growth is driven by increasing demand for digital transformation and cloud-based solutions, as well as the company's strategic acquisitions.
    • The company's profitability is also impressive, with a non-GAAP operating margin exceeding 27% in Q2 2024. This strong profitability is driven by its focus on innovation, product development, and effective expense control.
    • ServiceNow's return on assets (ROA), return on equity (ROE), and return on invested capital (ROIC) are significantly higher than the industry average, indicating that the company is more profitable than its peers.
    • Compared to its peers, CRWD and PANW, ServiceNow has generally provided higher annualized returns over the past three years. However, it has also been more volatile, suggesting a higher risk profile.

  3. Operational Efficiency:

    • ServiceNow maintains a strong liquidity position, with a current ratio above 1.0 and a quick ratio above 1.0, indicating sufficient liquid assets to cover short-term obligations.
    • The company's working capital management is efficient, with a consistent positive working capital balance.
    • ServiceNow generates strong operating cash flows, driven by its profitable business model and efficient operations. The company's free cash flow generation is also robust, providing flexibility for strategic initiatives.
    • The company's asset quality is high, with a low level of goodwill and intangible assets relative to its total assets.
    • ServiceNow's capital expenditures have been increasing, reflecting its investments in growth initiatives. The company has not yet implemented a dividend policy, but it has been actively repurchasing shares.
    • Compared to its peers, ServiceNow has a lower debt-to-equity ratio and a lower debt-to-EBITDA ratio, indicating a lower level of leverage and a stronger solvency position.

  4. Growth Opportunities:

    • ServiceNow is well-positioned to capitalize on the growing demand for digital workflow automation solutions. The company is expanding its market reach through strategic acquisitions, such as the acquisition of Raizen, a data company that will enhance its Gen AI-powered search and knowledge management capabilities.
    • ServiceNow is investing heavily in research and development to enhance its platform and develop new AI-powered solutions. The company's R&D pipeline is robust, with a focus on areas like data governance, operational technology, and industry-specific solutions.
    • ServiceNow is expanding its geographic reach, targeting new markets with high growth potential. The company is also focusing on expanding its partnerships with key players in various industries to drive adoption of its solutions.
    • ServiceNow's management team has a proven track record of executing on strategic plans, as evidenced by the company's consistent growth and profitability.

  5. Risks and Threats:

    • ServiceNow faces several risks, including cybersecurity threats, data breaches, and the need to innovate and keep pace with rapidly evolving technology.
    • The company's reliance on channel partners could lead to conflicts of interest and potential reputational risks.
    • International expansion and managing global operations pose challenges that could impact the company's growth trajectory.
    • ServiceNow is also facing legal challenges, including an ongoing patent infringement lawsuit and an internal investigation into potential compliance issues.
    • The company's competitive landscape is intense, with established enterprise software vendors and new market entrants vying for market share.

  6. Valuation Analysis:

    • ServiceNow's valuation metrics, such as its price-to-earnings (P/E) ratio and enterprise value-to-EBITDA (EV/EBITDA) ratio, are relatively high compared to its peers. This reflects the company's strong growth prospects and profitability.
    • Compared to its peers, ServiceNow's valuation is generally in line with or slightly higher than CRWD and PANW, reflecting its strong growth potential and market position.
    • Potential catalysts for ServiceNow's stock price include continued strong revenue growth, expansion into new markets, and successful execution of its AI-powered business transformation strategy.

  7. Price Performance:

    • ServiceNow's stock price has generally outperformed the Technology Select Sector SPDR Fund (XLK) over the past three years, with the exception of the three-year period.
    • ServiceNow has been more volatile than XLK, as evidenced by its higher annualized volatility and larger drawdowns.
    • Compared to its peers, ServiceNow has exhibited a mixed performance, outperforming CRWD and PANW over longer periods but underperforming in shorter periods.

  8. Future Outlook:

    • ServiceNow's management team is confident in the company's ability to navigate potential macroeconomic uncertainties, citing strong demand for its platform and the critical role of AI-powered business transformation.
    • The company's guidance for Q3 2024 and full-year 2024 indicates continued strong growth in subscription revenue and operating margin.
    • Analyst estimates for ServiceNow's future performance are generally positive, with a consensus view of continued growth and profitability.

  9. Summary:

    • ServiceNow is a leading provider of cloud-based workflow automation solutions with a strong market position and a robust financial performance. The company is well-positioned to capitalize on the growing demand for digital transformation and AI-powered solutions.
    • ServiceNow's key strengths include its strong financial position, efficient operations, and a proven track record of executing on strategic plans. However, the company faces several risks, including cybersecurity threats, competition, and legal challenges.
    • ServiceNow's valuation is relatively high compared to its peers, reflecting its strong growth prospects and profitability. The company's future success will depend on its ability to continue executing on its strategic priorities and effectively managing its risks.
    • ServiceNow's investment profile is characterized by high growth potential, a strong financial position, and a higher risk profile. Investors should carefully consider their risk tolerance and investment goals before investing in ServiceNow.
Peer fundamentals 
Fundamentals
Insights
  • ServiceNow is a leading provider of cloud-based digital workflow automation solutions, with a strong market position and growing customer base across various industries.
  • The company is benefiting from the increasing demand for digital transformation and cloud-based technologies, but faces competition from both established enterprise software vendors and new market entrants.
  • ServiceNow has a strong financial position, with a high level of profitability, a strong liquidity position, and a low level of debt.
  • The company's cash flows are increasing, driven by strong net income growth and continued investments in product development and acquisitions.
  • The company's future success will depend on its ability to continue executing on its strategic priorities and effectively managing its risks.
Analysis
  • Revenue - ServiceNow's revenue growth is strong and sustainable, driven by the increasing demand for digital transformation and cloud-based workflow solutions. - The company's revenue growth has been consistently decreasing over the 5-year period, but it is still significantly higher than the industry average. - The company's recent acquisitions, such as G2K Group GmbH and Raizen, have likely contributed to the increase in revenue. - Management has stated that they are focused on driving growth and profitability, which is reflected in the company's strong financial performance.
    • Profitability
      • ServiceNow is highly profitable, with strong margins and a growing bottom line.
      • The company's profitability ratios are significantly higher than the industry average, indicating that ServiceNow is a more profitable company than its peers.
      • The company's profitability has been relatively stable in recent quarters, indicating that it is maintaining its profitability.
      • The company's strong profitability is driven by its focus on innovation and product development, as well as its effective expense control.
    • Liquidity
      • ServiceNow has a strong liquidity position, with a current ratio above 1.0.
      • The company's quick ratio is also above 1.0, indicating that it has sufficient liquid assets to cover its short-term obligations.
      • The liquidity ratios have been relatively stable in recent quarters, indicating that the company is maintaining its liquidity position.
      • The liquidity ratios are below the industry average, which could indicate that ServiceNow is less liquid than its peers.
    • Solvency
      • ServiceNow has a strong solvency position, with a low debt-to-equity ratio and a low debt-to-EBITDA ratio.
      • The company's cash flow coverage ratio is also high, indicating that it has sufficient cash flow to cover its debt obligations.
      • The solvency ratios have been relatively stable in recent quarters, indicating that the company is maintaining its solvency position.
      • The solvency ratios are significantly below the industry average, indicating that ServiceNow is less leveraged than its peers.
    • Operational Efficiency
      • ServiceNow's asset utilization efficiency is high, as evidenced by its strong return on assets and return on equity.
      • The company's inventory turnover ratio is also high, indicating that it is effectively managing its inventory.
      • The efficiency ratios have been relatively stable in recent quarters, indicating that the company is maintaining its efficiency.
      • The efficiency ratios are not available for comparison to the industry average.
    • Cash Flow Analysis
      • ServiceNow's cash flows are increasing, driven by strong net income growth and continued investments in product development and acquisitions.
      • The company's free cash flow generation is strong, providing it with flexibility to pursue strategic initiatives, such as acquisitions and new product launches.
      • The company's cash flow to net income ratio has been decreasing over time, which could indicate potential concerns about the quality of earnings.
      • The company's capital expenditures have been increasing, reflecting its investments in its growth strategy.
    • Risk Factors
      • ServiceNow's reliance on channel partners could lead to conflicts of interest and potential reputational risks.
      • The company's ability to innovate and keep pace with rapidly evolving technology and customer needs is crucial for its long-term success.
      • Cybersecurity threats and data breaches could disrupt operations and damage reputation.
      • Challenges with international expansion and managing global operations could impact the company's growth trajectory.
      • Ongoing patent infringement lawsuit filed by InQuisient Inc. regarding the Now Platform's use of relational databases could pose operational and reputational risks.
      • Internal investigation into potential compliance issues related to the hiring of the U.S. Army CIO could pose operational and reputational risks.
    • Future Outlook
      • ServiceNow is well-positioned in the growing digital workflow automation market, with a strong market position and growing customer base across various industries.
      • The company is benefiting from the increasing demand for digital transformation and cloud-based technologies, but faces competition from both established enterprise software vendors and new market entrants.
      • The company's strong financial position provides it with flexibility to pursue strategic initiatives, such as acquisitions and new product launches.
      • The company's future success will depend on its ability to continue executing on its strategic priorities and effectively managing its risks.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-09-04)
Technology Select Sector SPDR Fund (XLK)
  • Performance Comparison: ServiceNow, Inc. (NOW) has generally outperformed Technology Select Sector SPDR Fund (XLK) over the past three years, with the exception of the three-year period. NOW has shown strong performance in the short term, particularly in the past year, but its long-term performance has been less impressive.
  • Risk and Return Analysis: ServiceNow, Inc. (NOW) has provided higher annualized returns than Technology Select Sector SPDR Fund (XLK) over the past two years. However, NOW has also been significantly more volatile than XLK, as evidenced by its higher annualized volatility. This suggests that NOW's higher returns come with a higher level of risk. The drawdown figures further support this conclusion, with NOW experiencing larger and more frequent drawdowns than XLK.
  • Risk-Adjusted Performance: While ServiceNow, Inc. (NOW) has generated higher returns, Technology Select Sector SPDR Fund (XLK) has consistently offered a better risk-adjusted return, as indicated by its higher Sharpe ratio. This suggests that XLK has been more efficient in generating returns relative to its risk. The beta value for NOW is also higher than XLK, indicating that NOW is more sensitive to market movements and carries a higher risk profile.
  • Overall Assessment: ServiceNow, Inc. (NOW) has shown strong short-term performance, but its long-term performance has been less impressive. The stock has been significantly more volatile than the broader technology sector, as represented by Technology Select Sector SPDR Fund (XLK), and has experienced larger and more frequent drawdowns. While NOW has generated higher returns, XLK has offered a better risk-adjusted return. Investors should carefully consider the stock's higher risk profile and its potential for volatility before making any investment decisions.
Peers Price History(as of 2024-09-04)
Palo Alto Networks, Inc. (PANW)CrowdStrike Holdings, Inc. (CRWD)
  • Performance Comparison: ServiceNow (NOW) has exhibited a mixed performance compared to its peers, CrowdStrike Holdings, Inc. (CRWD) and Palo Alto Networks, Inc. (PANW). While NOW has outperformed both CRWD and PANW over longer periods like 2 years and 3 years, it has underperformed in shorter periods like 1 year and 1 month. This suggests that NOW's performance is more volatile and less consistent compared to its peers.
  • Risk and Return Analysis: ServiceNow (NOW) has generally provided higher annualized returns than CRWD and PANW over the past three years. However, it has also been more volatile than its peers, as evidenced by its higher annualized volatility. This suggests that NOW offers a higher potential for returns but also carries a higher risk profile. The maximum drawdown figures further support this, with NOW experiencing a maximum drawdown of 51.3% in Q3 2022, significantly lower than CRWD's 68.05% in Q2 2024 and PANW's 78.56% in Q1 2023. This indicates that NOW's risk profile is lower than its peers, despite its higher volatility.
  • Risk-Adjusted Performance: ServiceNow (NOW) has generally exhibited a lower Sharpe Ratio than CRWD and PANW, indicating that it has not been as efficient in generating risk-adjusted returns. However, the Sharpe Ratios of all three companies have been increasing in recent quarters, suggesting a potential improvement in risk-adjusted returns.
  • Overall Assessment: ServiceNow (NOW) is a growth stock with a higher potential for returns than its peers, but it also carries a higher risk profile. While NOW has exhibited a mixed performance compared to its peers, it has generally provided higher annualized returns and has a lower maximum drawdown. However, its higher volatility and lower Sharpe Ratio suggest that it has not been as efficient in generating risk-adjusted returns. Investors should carefully consider their risk tolerance and investment goals before investing in NOW.
Peers Fundamentals(as of 2024-06-30)
Palo Alto Networks, Inc. (PANW)CrowdStrike Holdings, Inc. (CRWD)

  1. Market Position and Size:

    • NOW is the largest company in the peer group, with a market cap significantly larger than its peers, CRWD and PANW. This suggests that NOW has a strong market position and is a leader in the technology services sector.
    • While NOW's market cap is significantly larger than its peers, its revenue is only slightly larger than PANW's. This suggests that NOW may be trading at a premium valuation compared to its peers.
    • NOW's market cap is significantly larger than its peers, but its EBITDA is significantly larger than CRWD's. This suggests that NOW is more profitable than CRWD, but its valuation may be higher than its profitability would suggest.
    • NOW's market cap is significantly larger than its peers, but its net income is significantly smaller than PANW's. This suggests that NOW may be less profitable than PANW, but its valuation may be higher than its profitability would suggest.

  2. Profitability and Efficiency:

    • NOW has a significantly higher gross profit margin, EBITDA margin, and net profit margin than both its peers and the industry average. This indicates that NOW is very efficient at managing its cost of goods sold and generating profit from its sales.
    • NOW's profitability is high relative to its size and revenue. This suggests that NOW is very efficient at managing its costs and generating profit.
    • NOW is overperforming in profitability metrics compared to both peers and industry standards. This suggests that NOW is a very profitable company and has a strong competitive advantage.

  3. Financial Health and Stability:

    • NOW has a relatively low level of debt compared to its peers and the industry. This suggests that NOW has a strong financial position and is not overly leveraged.
    • NOW's liquidity and debt position are strong relative to its market cap and peer group. This suggests that NOW is a financially stable company with a low level of debt.
    • NOW has a strong ability to generate cash from its operations, as evidenced by its high net operating cash flow and free cash flow. This suggests that NOW is a financially healthy company with a strong ability to fund its growth and return value to shareholders.

  4. Valuation and Market Perception:

    • NOW's enterprise value to sales ratio is higher than both its peers and the industry average. This suggests that NOW is trading at a premium valuation compared to its peers and the industry.
    • NOW's enterprise value to EBITDA ratio is lower than CRWD's but higher than the industry average. This suggests that NOW is trading at a premium valuation compared to the industry, but its valuation is not as high as CRWD's.
    • NOW's price to earnings ratio is lower than CRWD's but higher than PANW's and the industry average. This suggests that NOW is trading at a premium valuation compared to the industry, but its valuation is not as high as CRWD's.
    • NOW's price to book ratio is lower than both its peers and the industry average. This suggests that NOW is trading at a premium valuation compared to the industry, but its valuation is not as high as its peers.
    • NOW's price to sales ratio is higher than PANW's but lower than CRWD's and the industry average. This suggests that NOW is trading at a premium valuation compared to PANW, but its valuation is not as high as CRWD's or the industry average.
    • NOW's valuation is high in the context of its market cap, peer group, and industry standards. This suggests that the market has high expectations for NOW's future growth and profitability.

  5. Cash Flow and Capital Management:

    • NOW's net operating cash flow is higher than CRWD's. This suggests that NOW is generating more cash from its operations than CRWD.
    • NOW's total capital expenditure is higher than CRWD's. This suggests that NOW is investing more in its business than CRWD.
    • NOW's free cash flow is higher than CRWD's. This suggests that NOW is generating more free cash flow than CRWD.
    • NOW's cash flow generation strength is strong relative to its size, peers, and industry norms. This suggests that NOW is a financially healthy company with a strong ability to generate cash from its operations.

  6. Growth and Future Prospects:

    • NOW shows consistently higher growth in EBITDA compared to the peer group average. This suggests that NOW is growing its profitability at a much faster rate than its peers.
    • NOW shows consistently higher growth in book value per share compared to the peer group average. This suggests that NOW is growing its shareholder value at a much faster rate than its peers.
    • NOW shows consistently lower growth in sales/revenue compared to the peer group average. This suggests that NOW is growing its revenue at a slower rate than its peers.
    • NOW shows consistently lower growth in free cash flow compared to the peer group average. This suggests that NOW is growing its free cash flow at a slower rate than its peers.
    • NOW's 5-year CAGR for sales/revenue is significantly lower than the peer group average. This suggests that NOW's long-term revenue growth is lagging behind its peers.
    • NOW's 5-year CAGR for EBITDA is significantly higher than the peer group average. This suggests that NOW's long-term profitability growth is outpacing its peers.
    • NOW's 5-year CAGR for net income is significantly higher than the peer group average. This suggests that NOW's long-term net income growth is outpacing its peers.
    • NOW's 5-year CAGR for basic earnings per share is significantly higher than the peer group average. This suggests that NOW's long-term earnings growth is outpacing its peers.
    • NOW's 5-year CAGR for free cash flow is significantly lower than the peer group average. This suggests that NOW's long-term free cash flow growth is lagging behind its peers.
    • NOW's 5-year CAGR for total assets is significantly lower than the peer group average. This suggests that NOW's long-term asset growth is lagging behind its peers.
    • NOW's 5-year CAGR for book value per share is significantly higher than the peer group average. This suggests that NOW's long-term shareholder value growth is outpacing its peers.
    • NOW's growth is concentrated in profitability metrics, such as EBITDA and net income, while its revenue growth is lagging behind its peers. This suggests that NOW is focusing on improving its profitability rather than expanding its market share.
    • NOW's growth profile is mixed, with strong growth in profitability metrics but slower growth in revenue and free cash flow. This suggests that NOW is a profitable company, but its growth may not be sustainable in the long term.

  7. Potential for Investment:

    • NOW is an attractive investment for investors seeking exposure to the technology services sector. Its strong profitability, cash flow generation, and financial stability make it a solid investment.
    • However, its slower revenue growth and premium valuation compared to its peers raise concerns about its long-term growth potential. Investors should carefully consider these factors before making an investment decision.

  8. Key Risks and Considerations:

    • NOW's slower revenue growth compared to its peers suggests that it may be losing market share to competitors. This could impact its future profitability and growth potential.
    • NOW's premium valuation compared to its peers and the industry suggests that the market has high expectations for its future growth and profitability. If these expectations are not met, NOW's stock price could decline.
    • NOW's profitability is volatile and may be subject to external factors. This could impact its future earnings and shareholder value.

  9. Overall Assessment:

    • NOW is a financially healthy company with a strong track record of profitability and cash flow generation. Its high gross profit margin, EBITDA margin, and net profit margin indicate strong operating efficiency and a competitive advantage. NOW's low debt levels and strong cash flow generation further support its financial stability. However, its slower revenue growth and lower return on assets compared to PANW raise concerns about its long-term growth potential.
    • NOW is a leading player in the technology services sector, with a strong market position and a large market capitalization. Its high profitability and strong cash flow generation suggest that it has a competitive advantage in the industry. However, its slower revenue growth compared to its peers suggests that it may be losing market share to competitors.
    • NOW is an attractive investment for investors seeking exposure to the technology services sector. Its strong profitability, cash flow generation, and financial stability make it a solid investment. However, its slower revenue growth and premium valuation compared to its peers raise concerns about its long-term growth potential. Investors should carefully consider these factors before making an investment decision.