ServiceNow: Service-as-Software

04/27/2016 7:00 am EST


We are launching coverage of this technology stock with a buy rating; the company provides scalable IT services management to enterprises using a subscription-based, software-as-a-service model, explains analyst Joe Bonner of Argus Research.

ServiceNow (NOW) provides value to customers by making IT services, which touch every area of a business from human resources to field sales, more manageable and efficient — thus lowering the total cost of ownership.

Its offerings benefit from the secular trend away from the enterprise data center and toward the more easily scalable and cost-effective software-as-a service model.

ServiceNow remains unprofitable on a GAAP basis, but has posted non-GAAP earnings over the last six quarters.

The stock was beaten down in the January-February market selloff, and its current depressed valuation contrasts with what could be a strong revenue and profit ramp over the next few years.

ServiceNow has about 3,000 customers, up 27% from the 4th quarter of last year. It added 174 new customers in the fourth quarter, consistent with the previous five quarters. Revenue per customer rose 16% year-over-year to $338,000.

ServiceNow is targeting the Forbes Global 2000 (G2K) largest enterprises. The company had 638 G2K customers, or about 30% of this group, at the end of 2015.

These customers had an average annual contract value of $868,000 (up 6% sequentially in the 4th quarter of 2015) and accounted for about 50% of total revenue. NOW expects to quadruple total annual revenue to $4 billion by 2020.

ServiceNow also offers an entry-level IT service management solution, called Express, aimed at the small and medium-sized enterprise market. The company has about 400 Express customers.

Customer retention does not seem to be a problem for ServiceNow. The retention rate has been in the upper 90’s over the last five quarters, and was 99% in the 4th
quarter of 2015.

Our discounted cash flow analysis indicates a fair value of $89 per share. We are initiating coverage of ServiceNow with a buy rating and a target price of $86.

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By Joe Bonner of Argus Research

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