25% Below Its High, ServiceNow Inc. Stock Is 26% Undervalued

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Investors lack the information to decide which stock to buy. To be sure, there are rules that bring about changes in the stock price of the company.

One of my favorites — “Beat and Rise” — says that if a company reports quarterly revenue and earnings growth and raises its forecast higher than investors expected, the stock price will go up. Otherwise it will go down.

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Investors can’t know until it’s too late whether a company will beat and grow every quarter until it’s too late. But if they analyze a company’s track record of doing so and assess whether the company is investing well in future growth, investors can make reasonable long-term bets.

Sadly for investors, that rule is periodically overshadowed by another – institutional ambiguity (IO). IO refers to the sudden decision by institutional investors – or the computers they run – to bet high amounts to buy or sell entire categories of stocks.

IO is particularly difficult for individual investors because unlike publicly traded companies – which must disclose detailed information about their performance and prospects – institutions do not have to prematurely disclose the rationale for their trading decisions. Does matter.

One such institutional trade is a sectoral rotation – the decision to move capital from high-growth technology companies to so-called cyclical stocks driven by the expectation that higher interest rates will boost the value of the latter.

This comes in the wake of a 25% drop in the stock of Service Now — the operator of a business cloud computing service — since it peaked last November. The decline coincides with a 7% drop in the tech heavy NASDAQ
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Still, analysts keep Service Now stock above the 26% where it trades now. If ServiceNow beats and rises when it reports fourth-quarter earnings on Jan. 26, its stock could rise sharply.

Given its continued rapid growth, ServiceNow shares have the potential to rise.

(I have no financial interest in the securities mentioned in this post).

Sectoral Rotation Growth Out of Stock

IO isn’t just for individual investors — it hurts hedge funds as well. how so? In form of wall street journal Reportedly, hedge funds that had enjoyed profitable runs — due to stock ownership in fast-growing technology companies — suffered their worst performance in years in 2021.

2021 hasn’t been a good year for hedge funds. They returned an average of 11.9% in 2021 — far short of the S&P 500’s 28.7% return and the Nasdaq’s 22.2% gain. The Journal attributed the hedge fund’s pain to losses at the end of 2021 for “one of the largest pots of money in the hedge-fund industry at more than $4 trillion for growth- and technology-oriented strategies.”

The losses were triggered by growth out of growth on expectations of higher interest rates and by sectoral rotation in financial stocks. The Journal wrote that growth stocks “weaken as investors migrate to sectors such as financials, which have traditionally benefited from higher rates.”

I find it interesting that investors told the Journal that the nomination of Jerome Powell as Fed chair in November triggered a sell-off. Is this really the reason? We have no way of knowing which investors sold their tech stocks, how many they dumped, and what drove their decisions.

If tech stocks fell because of Powell’s nomination, how did hedge funds get caught so flat-footed that they didn’t take their profits when there were rumors of a renaming?

With expectations of higher interest rates already widely known, whether to proceed to invest in cyclicals – which hasn’t done so well given the BKW Nasdaq Bank Index (up only 0.5% since early November) — Or would investors be better off betting on growth companies with higher odds of beating and growth?

ServiceNow performance and prospects

When ServiceNow last reported earnings — it surpassed expectations and guidance for its third quarter. Yet its stock fell.

how so? According to market inspectionOf course, ServiceNow’s third-quarter revenue rose nearly 31% to $1.51 billion — $30 million more than expected — as its adjusted earnings per share of $1.55 were 16 cents higher than analysts’ estimates.

ServiceNow’s revenue guidance for the fourth quarter was slightly above expectations. Notably, ServiceNow’s fourth-quarter subscription revenue guidance was $1.52 billion — $10 million higher than the analyst average, while the company’s forecast for billions — $2.31 billion — was on par with expectations.

Service Now said its service lets companies build more applications with fewer engineers. As CEO Bill McDermott told MarketWatch, “Around 500 million new applications will need to be built by enterprises over the next two and a half years. provides.

When ServiceNow reports fourth-quarter results on January 26, investors are expecting revenue of $1.6 billion — 28% more than a year ago. marketbeat,

To beat expectations, the company would need to forecast growth of more than 25% for the current year. how so? For 2022, investors expect ServiceNow’s revenue to grow 25% from $5.88 billion to $7.37 billion, according to analysts surveyed by Zacks.

ServiceNow Development Processes

Unlike hedge funds and other institutional investors, individuals who buy stocks are not judged on annual performance. Such individual investors can judge their success over longer time frames.

ServiceNow has been the winner on this basis. Specifically, I am researching 36 publicly traded technology companies. In the decade from 2010 to 2020, ServiceNow’s revenue topped the list — growing at an average annual rate of 59.2%, while its stock grew at a 44% year-on-year rate.

ServiceNow performs four processes that contribute to its long-term growth. As I wrote in June 2021, these include:

  • This creates compelling value for customers. For example, it helped Lloyds Banking Group’s Payments Operations unit to increase customer satisfaction by solving problems 70% faster, reducing errors and eliminating mundane tasks for agents. This kind of value creation helps Service Now win over new customers, keeps them from getting ahead of competitors, and helps them buy more services over time.
  • It grows organically rather than acquired. ServiceNow has evolved to adapt its core service to new corporate departments. Specifically, it expanded its skills in managing workflows from IT service management to IT operations management and business management. If ServiceNow can sell more to its existing customers as it adds new ones, it should grow rapidly.
  • Its culture attracts and inspires great talent. Innovation depends on hiring and motivating talented people and ServiceNow says it’s doing it well. Last June, McDermott told investors the company was hiring 3,000 new people. He also added, “Our employee engagement scores are rising. Our people are really happy and … poised to be the fastest growing SaaS company in the world.”
  • It empowers people and holds them accountable. ServiceNow has a process to convert these skills into results. As CFO Gina Mustantuono told me, “Each employee’s job is tied to the strategy and priorities needed to achieve between $10 billion and $15 billion in revenue. Each person has three to five goals. which they relate to corporate priorities.”

What does all this mean for investors? If Wall Street analysts are worth their salt, Service Now stock trades at a 25% discount from its target price. If that means anything, you should be able to buy the shares now and enjoy a 36% return on your investment once the shares rise to that target price. WallstreetGen,

Later this month, we’ll see if ServiceNow can beat growth expectations and guidance above 25% could pop its stock. But the Fed’s announcement for even higher interest rates could drive ServiceNow stock down even further.

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