Stock Talk #9: $NOW Podcast

Thank you to all who responded on the podcast survey from the last Stock Talk – I took your feedback and published my first interview with my brother, Josh, a long-time ServiceNow consultant who talked about the company’s growth prospects and resiliency to C19 in an awesome 27 minute episode (right below the 30 minute threshold most people wanted in the survey!). You can find the full episode here or below:

For those of you with Apple devices, you can subscribe to the podcast to receive future ones immediately here. Note that Apple takes up to 24 hours to update its feeds, so the podcast right now is on Podbean but not on iTunes.

$NOW has been on my watchlist a long time and I’m kicking myself for not buying it five years ago. A quick intro – ServiceNow provides a robust platform for companies to build applications and APIs to apply to HR, CSM (Customer Service Management) and more. They have incredible customer loyalty (anywhere from 97-99% retention over the last few quarters) and generally originate 2-3 year contract terms for customers, and pre-C19 guided for $4 billion of subscription revenue in 2020. They had an absolutely knock-out fourth quarter and report first quarter earnings on April 29 after the close, which I’ll definitely do a write-up on.

The current market cap is $57 billion, which feels a little expensive for a company that in 2019 did ~$3.5 bn in sales for FY2019 (~16x P/S). That said, NOW has been growing over 30% per year and a company-wide goal is to reach $10 billion in sales, which assuming 30% growth it should reach by the end of 2023. If you assign an 10x P/S multiple at that revenue, NOW is an $100 billion company by the end 2023, which is a 75% overall return / 15% annualized return. I also think the market is going to assign a large premium for companies like NOW that have locked-in revenue and a business critical product unlikely to be considered a cuttable expense (Josh does a good job talking about this on the podcast). Here’s what NOW’s stock price looks like at different P/S ratios and different revenues:

When viewed this way, the ~$300 price tag on the stock doesn’t look that crazy. It’s a great business growing fast that is more insulated from Coronavirus than the great majority of companies.

Enjoy the Sunday coffee,