Given the recent volatility in the broader market, many investors are looking for oversold stocks. One name that was heavily sold off last month looks like an interesting opportunity worth considering today Immediate service(NYSE: NOW). The digital workflow expert recently completed not only The stock split into 5-for-1, making it cheaper, but it’s also a significant beneficiary of investments in artificial intelligence (AI) companies, and its revenue is soaring.
However, the stock price has taken a beating, down about 28% year to date.
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Is this a buying opportunity, or is the share price still too expensive to call it a buy?
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The software provider’s recent business growth has been outstanding. ServiceNow’s subscription revenue in the fourth quarter was US$3.5 billion, a year-on-year increase of 21%.
Additionally, the company is proving that it can turn revenue momentum into strong cash generation. Its non-GAAP free cash flow margin (free cash flow as a percentage of sales) was an impressive 57% in the quarter. Additionally, ServiceNow’s non-GAAP operating margin increased 150 basis points year over year to 31%.
Behind those numbers is a clear acceleration in the company’s AI-focused products. Management noted that its Now Assist product, the generative AI experience the company offers for its Now platform, had annual contracts worth more than $600 million during the period. Additionally, the company’s AI-focused control tower transaction volume nearly tripled sequentially.
Its enterprise adoption metrics are also compelling.
The company completed 244 transactions with annual net new contract value of $1 million or more during the quarter, a 40% year-over-year increase. Additionally, more than 600 customers had annual contracts worth more than $5 million at the end of the period.
“Our fourth quarter results handily exceeded expectations, as we have consistently done for many years,” Chief Executive Bill McDermott said on the company’s fourth-quarter earnings call.
The future prospects are also promising. The company’s current remaining performance obligations (contract revenue recognized within the next 12 months) increased 25% year over year to $12.9 billion.
Looking ahead, management expects first-quarter subscription revenue of $3.65 billion to $3.655 billion. This forecast implies midpoint year-over-year growth of approximately 21.5%, indicating continued strong growth for the company.
On the face of it, ServiceNow appears to be an attractive option for growth investors. But the problem is that the market is already pricing in huge future success.
The P/E ratio is currently around 32x, and investors are assuming near-perfect execution at this point. In other words, this valuation is expected to deliver 20% revenue growth for the foreseeable future, despite intense competition in the market that may cause growth to decelerate at some point.
But before we form an opinion, there’s one more thing worth mentioning about the stock. After spending nearly $600 million to repurchase stock in the fourth quarter alone, ServiceNow approved a massive $5 billion stock repurchase program in January and said it planned to immediately repurchase about $2 billion through an accelerated repurchase program. Not only are these share repurchases likely to help shareholder returns over the long term, but they are also a sign that management considers its stock attractive.
I think ServiceNow stock is fairly valued given its aggressive stock repurchase program and strong business momentum. In other words, if I already own the stock, I’ll probably hold on to it as long as the business continues to grow at a similar rate to what it has been. But before I consider buying into this growth story, I’d ultimately like to see the stock trade at a deeper discount.
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Daniel Sparks and his clients have no positions in any of the stocks mentioned. The Motley Fool has a position and recommends ServiceNow. The Motley Fool has a disclosure policy.
This stock split is a major beneficiary of artificial intelligence. But is its recent sell-off a buying opportunity? Originally posted by The Motley Fool
