ServiceNow: Success in the Cloud

11/16/2016 9:00 am EST


Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

This firm’s cloud software isn’t something that most people will ever hear of, but for thousands of businesses (including 705 of the Global 2000), it’s become a vital tool to radically boost worker productivity, explains Mike Cintolo, growth stock expert and editor of Cabot Growth Investor.

ServiceNow (NOW) takes a service-oriented approach to organizing and communicating the countless day-to-day requests from employees and suppliers.

We’ve been following ServiceNow for a few years and even owned it once (back in early 2014).

It got its start with IT departments (handling the never-ending stream of help requests for technology snafus), but now it’s branched into numerous other areas.

Customers love it — not only are accounts growing, but once they come, they stick around (renewal rates are usually north of 95% and were 99% in the third quarter) and buy more (69% of customers use more than one of ServiceNow’s offerings, up from 59% a year ago).

That’s led to great sales, earnings and cash flow growth (all north of 30% annually), and management expects that growth rate to continue at least through 2020, when free cash flow could total north of $6 per share according to some analysts.

In the intermediate-term, analysts see earnings rising 50% next year as more and more of the recurring revenue falls to the bottom line.

After consolidating for many months, the stock has come alive following its third-quarter report two weeks ago.

There’s still a little overhead resistance from a year ago, but we’re more impressed with the fact that the stock has held most of its earnings gains when the market had gone haywire. We're buying a position in NOW in our Model Portfolio.

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