Stemming from the latest stream of Internet-based companies to host an initial public offering, ServiceNow Inc. (NOW) raised $210 million as its shares priced above the planned range of $15-17. The company's offering of 11.7 million shares at $18/share was trumped by a closing price of $24.60 at the end of the first day's trading. The IPO was the most successful to date following the poor reception of Facebook's (FB) May offering. The amount of positive interest was also perceived as a breath of fresh air for an IPO market that has been placed on hold since Facebook's IPO fiasco.
In light of its IPO, ServiceNow joins a growing list of companies with business models that have come to incorporate the cloud. Tech giants like Google (GOOG), Amazon (AMZN), and IBM (IBM) all offer cloud-based services. Google has its Google Cloud Platform, Amazon has Amazon Web Services, and IBM has the IBM SmartCloud. Like most tech giants, each of these companies have come to adapt into some version of a broad spectrum of cloud-based services available to businesses.
Yet as businesses turn increasingly to the cloud in search for niche service solutions, stand-alone companies who have built their business models around a single area of expertise are becoming more prevalent. Whereas Google and Amazon have become best associated with "internet search" and "online shopping," companies like Salesforce.com, inc (CRM) and NetSuite Inc. (N) have become synonymous with customer relationship management and enterprise resource planning, respectively. Companies like Salesforce.com and Netsuite have niche proprietary software and operate under the model of software-as-a-service providers.
ServiceNow follows the footsteps of these latter companies and introduces itself as a very early-stage company and technology whose products can automate and integrate the Information Technology departments of their customers. From the company's S-1 filing, ServiceNow believes that it offers businesses three primary benefits when it comes to its cloud-based service:
- Single system of record for IT. ServiceNow provides a single system of record for IT executive and thereby streamlines the ability to monitor assets, activities, and resources across the multiple systems and infrastructures used by large enterprises.
- Lower total cost of ownership. ServiceNow assumes all the related costs of supporting its software solution, and therefore assumes the responsibility for it. This includes maintaining the application set, hosting infrastructure, customer support, storage requirements, security needs, etc. All of these costs are thereby lifted off of the client's area of responsibility.
- Easy to use and widely accessible. ServiceNow's application suite is accessed through a web-based interface and is therefore accessible anywhere and any time provided an internet connection exists. This even allows for on-the-go access through mobile devices which can greatly enhance the efficiency of any enterprise.
To date, the company has performed exceedingly well which accounts for its impressive reception. Since its IPO, the company's stock has increased over 40% as of July 4. From December 2010 to December 2011, the company's revenues grew 93% from $37.9 million to $73.4 million. In terms of customer base, the company went from 602 clients in December 2010 to 974 in December 2011, an increase of 62%. With such rapid growth along with a comfortable gross profit margin range in the realm of 60-70%, ServiceNow appears poised for sequential years of corporate growth as businesses continue to pursue cloud-based solutions.
Yet seemingly with all internet-based technology companies, investors may want to exercise some cautious awareness to the premiums often placed on these cloud-based providers. With Salesforce.com trading at price-to-earnings ratio of 71 and NetSuite at 162, it's clear that the market has a strong appetite for unknown growth potential. ServiceNow appears ready to follow in these steps. But one does have to wonder how long the party can continue or when these companies may find themselves face-to-face with a more quantifiable growth expectation.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.