In this segment of the Motley Fool Money podcast, host Chris Hill and senior Fool analysts Jason Moser, David Kretzmann, and Jeff Fischer respond to a listener from across the pond who is feeling enthusiastic about ServiceNow (NYSE:NOW) and wants their views on the growing company and its enterprise software peers. They weigh in on the investment thesis.
A full transcript follows the video.
This video was recorded on April 27, 2018.
Chris Hill: From Adam Godfrey in Derby, England. Adam writes, "I'm excited about an enterprise software business called ServiceNow. It recently hit $2 billion in revenue and it's on track to hit $4 billion in a couple of years. It's run by John Donahoe, formerly of PayPal. I'd like to know what you think about this business and the enterprise software space in general." Jeff, what do you think?
Jeff Fischer: In general, what an exciting space to be in. Enterprise software is becoming essential to almost every business, whatever you do. So, we see a lot of small companies, and ServiceNow is one of the bigger ones -- the ticker, by the way, is NOW -- it's a $29 billion market cap company, but there are a lot of other companies that are only $2-3 billion serving the enterprise software space, which is growing rapidly.
I think ServiceNow is a clear, by any measure, leader for a smallish, midsize company. It sells customer service software, human resources, security, workflow, all these things. It trades at only 40X free cash flow, which, for a company growing at about that rate, looks reasonable. That said, it won't be GAAP profitable until at least next year, but it has non-GAAP profits starting now. So, that's good. But, Adobe or Paycom or Atlassian or even the giant Salesforce, all these enterprise software businesses are doing really well. And I think down the road, we're going to see a lot of consolidation as well.
David Kretzmann: I agree. This is a very compelling space. And in general, if you can find a company that's growing their overall base of subscribers, maintaining or increasing retention rates, and increasing average revenue per user, that's a beautiful business model. And a lot of these enterprise software companies are doing just that. If you can find one that's a little bit earlier in its growth cycle, like a company that's $5 billion or less, I think that's where you should be looking if you're looking for future multibaggers over the next three to five years.
Chris Hill owns shares of PayPal Holdings. David Kretzmann has no position in any of the stocks mentioned. Jason Moser owns shares of PayPal Holdings. Jeff Fischer owns shares of Adobe Systems, Atlassian, and Paycom Software. The Motley Fool owns shares of and recommends Adobe Systems, Atlassian, Paycom Software, PayPal Holdings, and Salesforce.com. The Motley Fool has a disclosure policy.