Why ServiceNow Is Looking Like a Buy-and-Forget Stock

Enterprise software company SerivceNow (NOW 1.02%) may not have the reputation of Microsoft or Salesforce, but as a reliable growth stock, it's hard to beat.

In this episode of "Beat and Raise" recorded on Jan. 27, Fool contributors Will Healy and Brian Withers discuss ServiceNow's latest quarter and how the cloud stock continues to put up strong growth numbers even as its market cap has ballooned past $100 billion.

Brian Withers: Will, we're going to talk about ServiceNow. If you could, for members who aren't familiar, tell us a little bit about what ServiceNow does before you jump into the earnings.

Will Healy: Yes, ServiceNow is an enterprise management company. Well, they sell enterprise management software, I should say. It's over $100 billion in market cap. A lot of you haven't heard of this just because it's business-to-business, but this is huge. It's a huge market too, because companies like Broadcom, like Salesforce are also in this. It's big and it's fast-growth. For Q4, the revenue came in at $1.61 billion, that was a 29 percent increase year-over-year and that beat estimates. EPS was a 25 percent increase, so that also beat estimates. Again, for Q in 22, they again predict $1.61 billion and that was an increase in the estimates. That more or less tracks with the fiscal year 2021 results. Revenue increased 30 percent, whereas EPS surged by 28 percent during the entire fiscal year.

Brian Withers: It looks like the market really liked the result. I'm looking at the share price today, it's up nine percent, so it released earnings Wednesday after the close, so Thursday was the first trading day after the earnings release. With a beat, beat, and raise, I would hope that the market would respond positively.

Will Healy: It's been a tough market but the market liked the results they got from ServiceNow. Honestly with these concerns, it's really hard to find fault. They're is still heavily dependent on North America. Those tech companies that you see as they grow, there's a lower percentage in the US, a higher percentage in especially Asia and maybe less Europe to a lesser extent. That remained the same and I alluded to this earlier, the competitive market there are so many big players in these, but I think just because the industry is growing so fast, that's not really affecting them, but these are things that might affect them in later years maybe when the market slows down. But for now, this is a pretty solid performance. You got 29 percent increase in free cash flow. The increase ofmbillion-dollar or more customers by 25 percent, 99 percent of customers are renewing.

Brian Withers: I always love it when an enterprise software provider like this can have million-dollar customers. That just says the services that they provide is incredibly sticky and valuable, not only in the IT department but across the enterprise. I always love one-million-dollar customer number and to see it grow 25 percent in a competitive market, that's a big kudos for ServiceNow. I like that you mentioned that the valuation, it's a nice valuation now, it's come down quite a bit.

Will Healy: Yeah, I guess just 18 times sales, which that's high up from an S&P 500 average standpoint. But for a fast-growth tech company that really isn't all that high and it's the lowest level since the fall of 2020. As you can see in the chart it did not match the S&P 500's performance and like a lot of other tech stocks, the stock has fallen over the last couple of months. But with the solid results this company is starting in, I think this will be a fairly short for a drop. I do anticipate this company's stock that is, will make it come back.

Brian Withers: Yeah. I love the fact that the other piece and I haven't looked into ServiceNow all at deeply, but the fact that it's making those are GAAP earnings-per-share numbers, a $1.46. That's absolutely fantastic for a high-growth tech company.

Will Healy: I am sorry.

Brian Withers: You're speechless. [laughs]

Will Healy: Yes, I'm speechless. I believe they're a GAAP. I forgot to confirm that before, just check that.

Brian Withers: Awesome.

Will Healy: Sorry about that.

Brian Withers: Awesome. Anything to wrap up, Will.

Will Healy: Just a very solid quarter. Again, this is business-to-business, so it doesn't get as much attention as an Apple or Google or an Alphabet might get. But I think this is what investors need to pay more attention to, even if they don't really see the product in action.