Investing in growth stocks, especially in high-flying technology stocks, had proved to be a profitable strategy for over a decade. However, this changed in early 2021, when many technology companies saw share prices plummeting in a growth-to-value sector rotation.
Some of these stocks, however, have made a major comeback in the last few months of 2021. Backed by strong fundamentals, improving financials, and significant competitive advantages, stocks like ServiceNow (NOW 2.63%) and Elastic (ESTC 4.25%) have already recovered their early 2021 losses and are now poised for further gains. Here's why these two technology stocks could prove to be attractive long-term picks for retail investors.
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1. ServiceNow
Enterprise digital transformation has become the megatrend of the current times. IDC estimates enterprises will spend around $7.8 trillion in digital transformation by 2024. ServiceNow is a software-as-a-service (SAAS) company that's set to profit from this trend.
The company offers cloud-based tools (like the Now Platform) to enable enterprise clients to easily automate digital workflows across disparate departments, processes, and people. The company's focus on improving IT workflows, customer workflows, employee workflows, and creator workflows (low-code or no-code development) helps improve cost-efficiency and productivity for the clients.
ServiceNow has estimated its target addressable market to grow from $114 billion in 2020 to $175 billion in 2024. The company has guided for annual revenues of over $10 billion by 2024 and over $15 billion by 2026.
Gartner (IT 1.62%) expects low-code or no-code technologies to be used for developing 70% of enterprise applications by 2025, a significant jump from 25% usage in 2020. ServiceNow remains focused on this opportunity. In March 2021, the company updated its Now Platform with low-code functionality and additional artificial intelligence capabilities (creator workflows) to enable creators to develop customized workflows with minimal coding.
Gartner now rates ServiceNow as one of 2021's leading enterprise low-code application platforms. ServiceNow's acquisition of robotic process automation (RPA) company Intellibot has further strengthened its automation capabilities in areas such as low-code technology, process mining, machine learning, predictive analytics, and integrations with external applications.
The success of ServiceNow's organic and inorganic growth efforts was apparent in the company's stellar third-quarter results (ending Sept. 30, 2021). Both revenues and earnings per share (EPS) surpassed consensus estimates. An important metric for SaaS companies, the company's subscription revenues were up 31% year over year (YOY) to $1.43 billion. This was driven by a solid 98% customer renewal rate and rapid adoption of the company's tools in industries such as transportation, logistics, and business services.
Current remaining performance obligations (cRPO) rose 32% YOY to $5 billion. cRPO is a metric used to measure the pace of bookings in the next 12 months. The company is also profitable and free-cash-flow positive.
ServiceNow is currently a $133.4 billion market capitalization company. Based on its business proposition and solid financials, the stock can prove to be an attractive pick for retail investors.
2. Elastic
Data search and analytics company Elastic offers its enterprise clients a range of software tools (Elastic Stack) for deriving information and insights from huge amounts of data across a range of applications and solutions. Elastic Stack comprises several products -- such as Elasticsearch, Kibana, Logstash, Beats, and Elastic Agent -- which together ingest, analyze, and visualize data. These tools are used in three major areas: Enterprise Search, Security, and Observability.
Elastic has been focused on rapidly increasing its customer count. At the end of the first quarter of fiscal 2022 (ending June 30, 2021), the company catered to over 16,000 subscription customers. This includes over 780 subscription customers with an annual contract value (ACV) of over $100,000. Despite this, the company's customer base includes only 48% of Fortune 500 companies and 34% of Forbes 2000 companies. Hence, there is still much potential for Elastic to capture new business in the coming years.
Elastic has reported a net expansion rate close to 130% for the past several quarters, implying that the company's existing customers spent, on average, 30% more than what they spent in the previous year. This is testimony to the success of its upselling and cross-selling efforts. The company earns over 90% of its total revenues from subscriptions, which ensures high revenue visibility. The company has been consistently improving gross margins in the past two years and is now on a clear path to profitability.
The company's cloud offering, Elastic Cloud (Elastic Stack in a cloud environment), is growing at almost double the pace of the overall business. Currently accounting for almost one-third of the company's total revenues, Elastic Cloud could emerge as a major growth driver for the company.
Elastic estimates its total addressable market to be around $78 billion. With trailing 12-month (TTM) revenues of $673 million, there is much runway ahead for the company to grow in the coming years.
