ServiceNow Inc (NOW, Financial) closed at $557.43 per share on October 10, 2023, reflecting a slight daily loss of 1.24%. Despite this marginal dip, the stock has gained 2.07% in the last three months, with an Earnings Per Share (EPS) of 6.94. The question is: Is ServiceNow (NOW) significantly undervalued? Our in-depth analysis aims to answer this question. Continue reading to discover the true value of ServiceNow (NOW) and its potential for future returns.
A Glimpse into ServiceNow Inc
ServiceNow Inc provides software solutions that structure and automate various business processes through a Software as a Service (SaaS) delivery model. The company primarily focuses 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.
With a market cap of $113.70 billion and sales of $8 billion, ServiceNow (NOW, Financial) appears significantly undervalued with a GF Value of $805.96, compared to its current stock price of $557.43. This discrepancy suggests a potential for higher future returns.
Understanding the GF Value
The GF Value is a proprietary measure that estimates the intrinsic value of a stock. It is derived from historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at.
For ServiceNow (NOW, Financial), the GF Value indicates that the stock is significantly undervalued. This assessment is based on 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. On the other hand, if the share price is significantly below the GF Value Line, the stock may be undervalued and have higher future returns.
Because ServiceNow is significantly undervalued, the long-term return of its stock is likely to be much higher than its business growth.
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Assessing ServiceNow's Financial Strength
The financial strength of a company is crucial in avoiding permanent capital loss. To understand ServiceNow's financial strength, we consider the cash-to-debt ratio and interest coverage. ServiceNow has a cash-to-debt ratio of 2.15, ranking worse than 53.01% of 2722 companies in the Software industry. However, the overall financial strength of ServiceNow is 8 out of 10, indicating strong financial health.
Profitability and Growth of ServiceNow
Investing in profitable companies, especially those with consistent profitability over the long term, is often less risky. ServiceNow has been profitable 4 times over the past 10 years. Over the past twelve months, the company had a revenue of $8 billion and an Earnings Per Share (EPS) of $6.94. Its operating margin is 6.32%, which ranks better than 59.65% of 2756 companies in the Software industry. Overall, the profitability of ServiceNow is ranked 5 out of 10, indicating fair profitability.
ServiceNow's 3-year average revenue growth rate is better than 82.14% of 2396 companies in the Software industry. ServiceNow's 3-year average EBITDA growth rate is 33.2%, which ranks better than 80.26% of 1986 companies in the Software industry.
ROIC vs WACC
The profitability of a company can also be assessed by comparing its return on invested capital (ROIC) and the weighted cost of capital (WACC). 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. For the past 12 months, ServiceNow's return on invested capital is 10.09, and its cost of capital is 9.48.
Conclusion
In conclusion, the stock of ServiceNow (NOW, Financial) gives every indication of being significantly undervalued. The company's financial condition is strong and its profitability is fair. Its growth ranks better than 80.26% of 1986 companies in the Software industry. To learn more about ServiceNow stock, you can check out its 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
