ServiceNow Inc (NOW, Financial) experienced a 1.4% gain in its daily stock price and a 6.14% increase over the last three months. With an Earnings Per Share (EPS) (EPS) of 6.94, the question arises: Is the stock significantly undervalued? This article provides a detailed valuation analysis of ServiceNow (NOW), encouraging readers to delve deeper into the company's financial health and prospects.
A Snapshot of ServiceNow Inc (NOW, Financial)
ServiceNow Inc is a prominent player in the software industry, providing solutions to structure and automate various business processes via a SaaS delivery model. The company's primary focus is on the IT function for enterprise customers. ServiceNow began with IT service management, expanded within the IT function, and more recently directed its workflow automation logic to functional areas beyond IT, notably customer service, HR service delivery, and security operations. ServiceNow also offers an application development platform as a service.
Unveiling the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
ServiceNow's stock seems significantly undervalued based on GuruFocus' valuation method. The GF Value estimates the stock's fair value based on three key factors: historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. Conversely, if the share price is significantly below the GF Value calculation, the stock may be undervalued and have higher future returns. At its current price of $ 549.06 per share, ServiceNow stock appears significantly undervalued.
As ServiceNow is significantly undervalued, the long-term return of its stock is likely to be much higher than its business growth.
Assessing ServiceNow's Financial Strength
Companies with poor financial strength pose a high risk of permanent capital loss to investors. To avoid this, investors must review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are great ways to understand its financial strength. ServiceNow has a cash-to-debt ratio of 2.15, which ranks worse than 53.82% of 2750 companies in the Software industry. The overall financial strength of ServiceNow is 8 out of 10, indicating that it is strong.
Profitability and Growth of ServiceNow
Investing in profitable companies, especially those that have demonstrated consistent profitability over the long term, poses less risk. A company with high profit margins is also typically a safer investment than one with low profit margins. ServiceNow has been profitable 4 over the past 10 years. Over the past twelve months, the company had a revenue of $8 billion and Earnings Per Share (EPS) of $6.94. Its operating margin is 6.32%, which ranks better than 60.48% of 2720 companies in the Software industry. Overall, GuruFocus ranks the profitability of ServiceNow at 5 out of 10, indicating fair profitability.
Growth is one of the most important factors in the valuation of a company. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of ServiceNow is 26.6%, which ranks better than 82.29% of 2389 companies in the Software industry. The 3-year average EBITDA growth is 33.2%, which ranks better than 80.15% of 1990 companies in the Software industry.
ROIC vs WACC
Another way to assess the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. Ideally, the return on invested capital should be higher than the weighted cost of capital. For the past 12 months, ServiceNow's return on invested capital is 10.09, and its cost of capital is 9.19.
Conclusion
Overall, ServiceNow (NOW, Financial) stock appears significantly undervalued. The company's financial condition is strong, and its profitability is fair. Its growth ranks better than 80.15% of 1990 companies in the Software industry. To learn more about ServiceNow stock, you can check out its 30-Year Financials here.
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