Fresh Look: Service Now (NOW)

Hello everyone and welcome to First Focus from LeftBrain Investment Research. I'm Madhu Chaudhary, investment analyst here at LeftBrain, here to give you my recent insights on ServiceNow and conclusions on whether the stock makes for a good investment. Let's start by reviewing what ServiceNow actually does. ServiceNow is a cloud-based technology company that provides applications to help digitalize and automate workflows. In different areas of an enterprise. Let's try to understand how exactly ServiceNow solutions work and help clients become more efficient. To use one of the many examples, in an enterprise, typical tasks after a new employee joins the firm include documentation, new laptop issuance, health insurance, etc. In the pre-digital transformation era, these tasks were managed by multiple departments over emails back and forth. The manual process led to items dropping off, lack of visibility, and coordinating responses and clarifications led to significant waste of time. In the post-digital transformation era, ServiceNow cloud platform can be used to log, track, update, and resolve several employee onboarding tasks. By providing full visibility and collaboration tools, ServiceNow's platform improves client productivity and leads to significant cost savings. One of the most important aspects of ServiceNow is its versatility. This means that the company has immense room to expand its product suite and in turn its addressable market by selling additional products to its existing as well as new enterprise clients. The company has targeted to introduce at least 2 new products each year. Not surprisingly, the company estimates that its addressable market will expand to $165 billion in 2023 from $110 billion in 2018. At LeftBrain, a large and growing total addressable market is an important characteristic we look for when evaluating growth stocks. Let's have a look at the people behind the company. The company was founded by Fred Luddy, current chairman of the board, in 2003 when SaaS wasn't even a word. He was around 50 years old then with senior-level tech experience at a number of firms. He possesses a great sense of product design and software. Fred conceived the ServiceNow platform and gained initial traction and then handed over the CEO role to an external hire in 2011. Bill McDermott is the current CEO of the company. He was hired late last year. Bill brings vast level of enterprise product and sales experience as a CEO of SAP between 2010 and 2019 and CEO of SAP America between 2002 and 2010. He transformed SAP from a traditional software licensing business to a growing cloud business. During his reign, SAP stock went up nearly 300%. At LeftBrain, we dedicate significant amount of our time in assessing management quality, unlike most traditional sell-side research. We believe ServiceNow's management team has what it takes to scale up this business even further. Now that we have a clear picture of the company's business strategy and its management, let's look at how that translates into financials. The company's revenue has grown from $683 million in 2014 to $3.46 billion in 2019. While free cash flow has expanded from negative $13 million in 2014 to $964 million positive in 2019. Finally, let's focus on valuation. The company is currently trading at a price-to-sales multiple of 22 times, which is higher than other application software players as well as own historical averages, but justified given the solid growth prospects of the company. So what does all this mean for ServiceNow stock? ServiceNow is one of those rare cases It has something for everyone: solid growth, large total addressable market, strong market position, attractive margins and free cash flow, and a solid CEO and a founder. Additionally, it is also a beneficiary of the current digital transformation wave globally. With the long term in mind, LBIR feels the company is well positioned and we are giving ServiceNow a green light rating. For more investment insights with a view through the left brain lens, visit us at leftbrainii.com to like, share, and subscribe. Be a part of a growing community of left brainers who experience the informed decisions and independent —thought that powers our search for profitable investment opportunities. This is Madhu Chaudhary for First Focus from LeftBrain Investment Research. Thanks for watching, and I'll see you soon with more investment insights.