The recent market performance of ServiceNow Inc (NOW, Financial) has seen a daily gain of 2.33%, despite a 3-month loss of -4.95%. With an Earnings Per Share (EPS) of 6.94, one might wonder if the stock is significantly undervalued. In this article, we will explore this question through a thorough valuation analysis. Read on to discover the intrinsic value of ServiceNow.
A Snapshot of ServiceNow Inc (NOW, Financial)
ServiceNow Inc provides software solutions to structure and automate various business processes via a 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.
The current stock price for ServiceNow is $564.47. However, according to the GF Value, an estimation of the fair value of the stock, the price should be around $808.64. This suggests that ServiceNow may be significantly undervalued.
Understanding 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.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
At its current price of $564.47 per share and the market cap of $115.20 billion, ServiceNow stock gives every indication of being significantly undervalued. 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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Financial Strength of ServiceNow
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. ServiceNow has a cash-to-debt ratio of 2.15, which is worse than 52.91% of 2729 companies in the Software industry. GuruFocus ranks the overall financial strength of ServiceNow at 8 out of 10, which indicates that the financial strength of ServiceNow is strong.
Profitability and Growth of ServiceNow
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. 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 59.67% of 2760 companies in the Software industry. Overall, GuruFocus ranks the profitability of ServiceNow at 5 out of 10, which indicates fair profitability.
One of the most important factors in the valuation of a company is growth. 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 82.08% of 2394 companies in the Software industry. The 3-year average EBITDA growth is 33.2%, which ranks better than 80.28% of 1988 companies in the Software industry.
ROIC vs WACC
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its 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. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, ServiceNow's ROIC was 10.09, while its WACC came in at 9.37.
Conclusion
In summary, 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 80.28% of 1988 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.
