What I Like about Servicenow:
Table of contents
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Servicenow passed most of my stocks watchlist criterias:
1) Operates in a market where TAM is huge ✅
2) Good product reviews ✅
most of their products have ratings above 4 (out of 5)
3) Owns decent amount of market share (7%) in IT management software space ✅
4) Google search trend is up ✅
5) Site traffic trend line is up ✅
6) Solid Leadership team ✅
led by Bill Mcdermott
who had leadership & CEO roles in Enterprise software giant SAP for more than a decade,
which performed rather well during his tenure there.
7) Economic MOAT(s) ✅
Switching cost ✔️
Network effects ✔️
8) Growing International Sales ✅
source: Q3 investor presentation
9) Human Capital are mostly tech related roles ✅
10) Stock price valuation ✅
Stock price is down -41% as of 12Nov2022
and with its current LTM revenue amount
assuming if the stock price bounce back to its all time high price
it will have a PS ratio of 20X
which is considered a fairly valued range
given the stocks' median PS ratio is 18x
11) Financial performance check ✅, company has:
-ve net debt ✔️
+ve operating cash flows ✔️
+ve shareholders' equity ✔️
Revenue growth of up to 25% in the past 5 years ✔️
12) Social media following is increasing ✅
At a very high rate too
their Instagram followers count increased by up to 70% in the past 12 months alone.
What I dislike about Servicenow:
1) Small amount of customer base
Because Servicenow is focusing on serving Enterprise businesses,
their total customers count is merely 7,400
and only 1,500 customers > $1mill annual contract value
source: Q3 investor presentation
Hence thats why the number of product reviews are quite low,
making it a less reliable measure due to smaller sample size.
2) Not the most user-friendly products
This, coupled with the fact that they are focusing on serving Enterprise customers only
My concern is if a new startup who is able to provide products with:
better user experience &
able to sell it at a cheaper price (hence allowing them to target the SMEs- mass market)
there is a possibility that Servicenow's ability to continue to capture or retain their market share will be affected by then.
Similar to what:
Hubspot is doing to Salesforce in the CRM space.
Shopify is doing to Adobe (Magento) Commerce in the eCommerce space
3) The software industry segments Servicenow is operating in is experiencing very low growth rate.
System Infrastructure Software segment
has estimate growth rate of 3% in the next 5 years.
Administrative Software segment
Application Development Software segment
has estimate growth rate of 8% in the next 5 years.
Considering that inflation rate is about 3%
offset that with the industry growth rate above,
that means these segments net growth rate are actually stagnant or growing at a very low rate.
That means in order for Servicenow to continue to maintain their current high revenue growth rate of > 25%
they would have to excel in continuing in grabbing marketshare from the incumbent players in the industry.
which I am not very convinced at due to point 2 above.
While there are numerous indicators that show Servicenow is a solid business with strong fundamentals that is likely to perform well in the market in the next few years.
Due to my dislikes about the company above
I am making Servicenow a small portion (0.6%) of my total portfolio,
instead of making it a main asset (by allocating more than 5%) in my portfolio.
Since I value developing high conviction in the main assets I choose to invest in,
given how volatile the stock market can be.
Furthermore, since the main holdings in my current portfolio
already comprise mostly of companies focusing on B2B business model.
Personally, I would prefer to own businesses which sell goods & services to the mass market instead,
perhaps I may consider increasing my stake in Servicenow in the future,
when there are signs that they shift their focus on catering to the smaller businesses outside of the current Enterprise market they are serving.
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