Inevitable downturns are part of the investment process; however, we see no reason to alter our enth...
ServiceNow: IT Leader Eyes Cyber Security
04/02/2018 5:00 am EST
The company provides value to customers by making IT services, which touch every area of a business from HR to field sales, more manageable and efficient — thus lowering the total cost of ownership.
ServiceNow’s offerings benefit from the secular trend away from the enterprise data center and toward the more easily scalable and cost-effective cloud software-as-a service model.
ServiceNow remains unprofitable on a GAAP basis, but has posted non-GAAP earnings over the last 12 quarters. Stock-based compensation is also falling as a percentage of revenue.
Even after a strong run, NOW stock appears favorably valued by historical standards. We see a solid revenue and profit outlook over the next few years underpinning valuation.
On February 28, ServiceNow entered into a strategic alliance with Tenable Inc. The alliance links ServiceNow’s Security Operations solution with Tenable’s Cyber Exposure Platform. The aim of the alliance is to “simplify and accelerate” how business and government IT operations “understand, manage and reduce cyber risk.”
Together, the companies’ solutions automatically assess IT systems for vulnerabilities, prioritize issues for remediation, and confirm that the issues have been resolved. While a strategic alliance is often just that, we will have to see whether Tenable, a small private IT security firm, ultimately becomes ServiceNow’s next acquisition.
Our valuation methodology is multistage, including peer analysis, a multiple-analysis matrix applied to our proprietary forecasts, and discounted cash flow modeling. NOW shares have traded between $83 and $176 over the past year, and are currently near the high end of that range.
The shares have almost doubled over the last year, compared to a 17% gain for the Russell 1000 and a 37% gain for the Russell 1000 Technology Index. The trailing EV/sales multiple of 15.5 is just above the high end of the five-year historical average range of 12.0-15.0.
On a forward basis, ServiceNow’s EV/revenue multiple of 11.1 is 85% above the peer average, greater than the historical average premium of 70%. We are maintaining our buy rating with a revised target price of $201.
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