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ServiceNow: Profitability Is Added To The Growth Story

Feb. 05, 2019 1:48 PM ETServiceNow, Inc. (NOW)TEAM, WDAY1 Comment


  • The recent profitability of ServiceNow has become an additional argument to its growth story, making it a better option now.
  • As margins expand in the long term, ServiceNow’s price will show a more reasonable value for GARP investors.
  • Although ServiceNow continues to be a company trading at a high premium, it has slight advantages over its Workday and Atlassian peers.

After reporting the fourth quarter of 2018, ServiceNow Inc. (NYSE: NYSE:NOW) saw a rapid appreciation in its market value after showing better results than expected. Despite being a company with a high valuation within the application software industry, an analyst in Goldman Sachs (paywalled) initiated its coverage with a buy rating and a price target of $260.

Like other companies that offer software and applications in the cloud, ServiceNow has generated high expectations of growth coming from the digital transformation of IT systems. On the other hand, after a comparative analysis, we see that the company's business model offers slight advantages over peer companies that make it a little more attractive, especially in the medium and long term.

ServiceNow Knowledge17 presentation

Expansion Of Existing Customer Relationship Is Leading Growth

The strong momentum from its digital transformation products continues to keep revenues in a strong growth spurt. For its last quarter of 2018, ServiceNow reported that its subscription revenues increased 33% compared to last year, surpassing analysts' expectations, and positioning it at $666 million. For its part, revenue for the quarter was $715.44 million, growing 27% thanks to the expansion in services offered to customers.

We see that its offer based on the cloud has a solid competitive advantage given the nature of ServiceNow’s IT services, which have allowed the cross-selling and expansion of services in its customer base. Its strategy of creating long-term relationships with organizations, which have allowed unlocking opportunities in IT services, has kept ServiceNow in a strong secular trend. Executives remarked that by the end of 2018 their renewal rate was 98%, placing the company as a leader in customer retention within the industry.

We consider services such as IT Service Management (ITSM) and IT Operations Management (ITOM) as having strong competitive advantages given the high switch cost of these services

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Comments (1)

Awayk profile picture
Thank you for your article on this exciting and under-followed company. Any sense of where NOW stands currently in terms of Bob Evan's "Cloud Wars" rankings? They were #7 last I knew, which is good considering their well-established competition. Long NOW
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