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ServiceNow: One Of The Greatest SaaS Hits

May 01, 2020 10:16 AM ETServiceNow, Inc. (NOW)CRM6 Comments
Ishan Puri profile picture
Ishan Puri


  • ServiceNow reaffirmed its place as one of the greatest SaaS businesses with its Q1'20 performance.
  • Given the recent guidance, I perform a series of valuation tests that show the business as slightly undervalued.
  • It is a good time to start a position in these uncertain times given the highly recurring revenue nature, scale, and experienced management team.
  • The team is also adapting to the new covid reality.


ServiceNow (NYSE:NOW) is one of the greatest SaaS companies of all time. It reaffirmed its position with its recent Q1'20 performance, where it lowered overall guidance only 1% due to covid. Given the highly recurring nature of the business (>90% is recurring), scale ($4 billion this year in top-line), and experienced management team, this company remains one of my top picks for a long-term oriented SaaS investor.

Source: eWeek


I valued the business, incorporating the new financial results and outlook, on a variety of comparable and intrinsic methodologies. My conclusion after this valuation is that the business is slightly undervalued. Given the uncertain times we are in, if we see overall market drops it is a great time to start building a position. I would keep this on my watch list.

The output of my valuation shows a price target of $375, about 16% above current level (as of this writing).

Source: Valuation output

Let us dive into each of these approaches. First, let's start with comparables. We can see the business is still driven on an EV/S basis, and on an earnings is relatively expensive. It is one of the few SaaS plays that has shown consistent profitability, and that deserves a premium.

Source: Comparables and management estimates

Looking now at the DCF, we can see stable cash flows into the FCF model. Management provided guidance at 29% of revenue, which we flatlined across the period. It resulted in a significant undervaluation. Take this with a grain of salt as the inputs are highly sensitive. That is one reason I average all my approaches in the valuation model.

Source: DCF model

Recurring revenue

Management breaks out recurring and non-recurring revenue. It is striking to see that this is a pure SaaS business operating at scale. The real only other

This article was written by

Ishan Puri profile picture
Focused on fundamentals, pricing power, and competitive moats. I like founder-led teams. Looking for the next generation of great businesses, and always open to debating ideas with others.

Analyst’s Disclosure: I am/we are long NOW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (6)

Nice write-up.

I know this question necessarily involves pure speculation, but, what do you think about the future likelihood of ServiceNow being a potential takeover target? Granted, with ServiceNow's market cap hovering around $60 billion, this would be the most expensive software acquisition of all time, with the takeover premium, and, only a handful of companies have the balance sheet to pull this off (Microsoft, Alphabet, Amazon, maybe SAP). But, ever since ServiceNow and Microsoft announced a partnership in 2019, I've thought that Microsoft is one of the few companies that has the deep pockets and the aggressive Cloud ambitions to make an acquisition a distinct possibility, down the road.

Ishan Puri profile picture
It's a little big. With the recent CEO hire, they are trying to double in 5 years in market cap. I could see someone like MSFT coming in, or they merge with ADBE. But I don't think it's a big possibility
Fair point. Thank you for your insights.
D Lombardo profile picture
Great objective Valuation Analysis!!
Option Generator profile picture
Thanks for the write-up after the latest earnings report. The consistently high retention rate of 97%, growing cash flows (+/- 30%) and the fact that management provided a strong guidance make NOW a superstar. CEO McDermott stated his next goal is $10B in annual revenues.

However, as always, I do not believe that the trees grow into heaven at least in the short-term, which is why I sold some covered calls for May 15th. I'll need to roll out those to June. Collecting juicy premiums while allowing for capital appreciation.
One thing about the retention rate comes from the nature of these ITSM products. In order for the product to provide the expected service according to ITIL standards, they need to be populated with a lot of core data (company employees, locations, configuration items such as PCs, laptops, servers, etc). All of this, and getting the processes in the application (such as how it handles Incident or Change tickets) configured to match the needs of each department, takes a long time. So a move from one ITSM product to another can easily become a year long project (or even multi-year).

In the case of ServiceNow they also have the benefit of modern look-and-feel and better UI performance than a lot of the competition that is based on older technology. Besides that NOW management has been careful with introducing new features that are generally well liked.
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