The past six months have been a windfall for ServiceNow’s shareholders. The company’s stock price has jumped 58.5%, hitting $141.13 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now still a good time to buy NOW? Or is this a case of a company fueled by heightened investor enthusiasm? Find out in our full research report, it’s free.
Why Are We Positive on NOW?
Built on a single code base that processes more than 80 billion workflows and 6.5 trillion transactions annually, ServiceNow (NYSE: NOW) provides a cloud-based platform that helps organizations automate and digitize workflows across departments, from IT and HR to customer service and security.
1. ARR Surges as Recurring Revenue Flows In
While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.
ServiceNow’s ARR punched in at $15.51 billion in Q2, and over the last four quarters, its year-on-year growth averaged 22.3%. This performance was impressive and shows that customers are willing to take multi-year bets on the company’s technology. Its growth also makes ServiceNow a more predictable business, a tailwind for its valuation as investors typically prefer businesses with recurring revenue. 
2. Customer Acquisition Costs Are Recovered in Record Time
The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.
ServiceNow is very efficient at acquiring new customers, and its CAC payback period checked in at 23.8 months this quarter. The company’s rapid recovery of its customer acquisition costs indicates it has a highly differentiated product offering and a strong brand reputation due to its scale. These dynamics give ServiceNow more resources to pursue new product initiatives while maintaining the flexibility to increase its sales and marketing investments. 
3. Excellent Free Cash Flow Margin Boosts Reinvestment Potential
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
ServiceNow has shown terrific cash profitability, driven by its cost-effective customer acquisition strategy that enables it to stay ahead of the competition through investments in new products rather than sales and marketing. The company’s free cash flow margin was among the best in the software sector, averaging an eye-popping 33.4% over the last year.
Final Judgment
These are just a few reasons why we think ServiceNow is a high-quality business, and with the recent surge, the stock trades at 8.2× forward price-to-sales (or $141.13 per share). Is now the right time to buy? See for yourself in our full research report, it’s free.
Stocks We Like Even More Than ServiceNow
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