ServiceNow (NYSE:NOW) Stock a Buy: Simplifying IT with Cloud Computing

During the first half of the year, essentially every company that offers cloud-based software was rallying as the pandemic quickly transformed the way that most of the world handles business. While the trend of businesses moving to the cloud is here to stay, some of these hot software names received a reality check as their valuations got stretched and earnings expectations became extraordinarily high. Now that we’ve seen the true impact of the pandemic on these companies’ earnings over a few quarters, the market has had time to assess which companies are the real deal and which ones aren’t as compelling as investors initially assumed.

There’s one provider of cloud-based software-as-a-service applications that is standing out in a crowded sector thanks to its loyal customer-base and efficient platform. ServiceNow (NYSE:NOW) stock looks like one of the better buys in the information technology sector at this time after the company reported strong earnings that confirm it continues to benefit from secular trends and has room for continued growth. Let’s take a deeper look at ServiceNow below and discuss a few reasons why it belongs in your portfolio.

Innovative Enterprise Cloud Computing Solutions

The simplest way to explain ServiceNow’s cloud-based solutions is that they help companies to transform, manage, and improve their internal business processes. There is heavy demand for the Cloud-based IT service management (ITSM) solutions that ServiceNow provides because it can dramatically improve how an enterprise operates. A 2019 Oxford Economics survey of Chief Information Officers found that digital workflows have improved employee performance and productivity by over 75%, which is strong evidence that any major enterprise can benefit from ServiceNow’s technology.

The company offers cloud-based services that can automate workflows, enable customers to create service-oriented business applications, and focus on service management for things like customer support, human resources, security operations, and other enterprise departments. ServiceNow’s customer base includes nearly 80% of the Fortune 500 and the company reports a strong renewal rate of 98%. This tells us that ServiceNow customers are loyal and will continue generating recurring revenue for the company over time. There’s also the fact that it can be expensive for enterprises to switch to other ITSM platforms after implementing ServiceNow, which is yet another competitive advantage for this company.

Stellar Q3 Earnings

ServiceNow is benefitting from two major secular trends at this time – a massive digital transformation of companies all over the world and a migration to cloud computing. Look no further than the company’s Q3 earnings results for confirmation, as the company reported Q3 subscription revenues of $1.09 billion which represents 31% year-over-year growth. ServiceNow also added 1,012 total customers with more than $1 million in net new annual contract value, representing a 25% year-over-year increase in customers. The great thing about ServiceNow is that it appeals to any large enterprise in the world, including large federal organizations. It added some high-profile federal customers during the quarter including the US Air Force, the US Army, and Mount Sinai which resulted in Q3 becoming the company’s largest federal quarter.

These results exceeded analyst expectations and helped the stock rally up 5.71%% during the trading session following the release. The company’s management team also increased its full-year guidance and anticipates year-over-year revenue growth of 28%-29%. The bottom line here is that Q3 was a very strong period for the company that should give investors confidence in ServiceNow’s sustainable growth going forward.

Final Thoughts

While ServiceNow stock has had an epic run during 2020 and is up over 75% year-to-date, there is still plenty of room for it to run going forward. To quote ServiceNow’s CEO Bill McDermott, “COVID is redefining the future of work, accelerating digital transformation and amplifying the need to unify systems, silos, and processes into holistic enterprise workflows. ServiceNow is the platform for digital business.” As long as the current secular trends remain in place, companies at the forefront of the digital business revolution ServiceNow will flourish.

When you consider ServiceNow’s strong competitive advantage, loyal customer base, continued earnings growth, and its potential for considerable margin expansion going forward, it is without a doubt one of the best cloud-software businesses to own. Consider adding shares on the next pullback if you are interested in high growth software names like this one.