Value Line has initiated coverage of ServiceNow (NOW) in its flagship product, The Value Line Investment Survey. ServiceNow calls itself the Enterprise IT Cloud Company. It aims to automate and standardize business processes. ServiceNow offers its service under a Software-as-a-Service business model, which customers gain access to through a Web-based interface. The company’s headquarters are in San Diego, and ServiceNow has nine other domestic offices. It also has foreign offices that serve the United Kingdom, France, Germany, The Netherlands, Scandinavia, Singapore, and Australia. ServiceNow has 11 data centers and more than 1,200 employees.
ServiceNow was incorporated in 2004, offering a workflow system named Glide, but the company didn’t obtain its first paying customer until September of 2005. In 2006, notable companies such as Qualcomm (QCOM) and MetLife (MET) signed on, and most of ServiceNow’s customers are large companies in various industries such as technology, financial service, consumer products, and healthcare. In March of 2010, it reached the $50 million revenue level. In September of that year, ServiceNow was ranked 69th on the Inc. 500 list of fast-growing small companies. In June of 2012, the company had its initial public offering. Last year, revenues were $244 million, compared with $128 million in 2011.
There are some attractive features about ServiceNow’s business. Gross margins are high, typically at or above 70%. Renewal rates have been running in the mid- to high-90% range. Once a customer’s problem is solved, that customer sometimes uses ServiceNow for other applications. And the company’s offerings provide plenty of opportunity to “upsell” to existing customers, which now number more than 1,500. Revenue per customer has risen consistently, and no single customer makes up more than 10% of the top line. The balance sheet is in good shape. As of March 31, 2013, ServiceNow had about $145 million in cash and no debt. The stock has performed well since its IPO, having more than doubled in price (from $18 a share) in less than 12 months. There is significant insider ownership, with officers, directors, and private equity investors controlling 42% of the company.
A stock such as this is best suited for risk-tolerant investors. ServiceNow does not have a long track record as a publicly traded company. It must spend a significant amount of money to obtain customers and develop its business. Thus, it has not yet achieved consistent profitability. Indeed, the company posted losses in 2012 and in the first quarter of 2013. Moreover, management says, “we do not expect to be profitable for the foreseeable future.” It should come as no surprise that ServiceNow, as a company in its growth phase, does not pay a dividend. The IT sector is fragmented, and ServiceNow competes against much larger companies such as IBM (IBM - Free IBM Stock Report), Hewlett-Packard (HPQ - Free Hewlett-Packard Stock Report), BMC Software (BMC), and CA (CA).
For a more thorough look at ServiceNow’s business prospects, and the particular investment merits of its stock, subscribers should examine our full report in The Value Line Investment Survey.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.