In the crowded field of enterprise software companies, ServiceNow(NYSE: NOW) continues to stand out as a leader in workflow automation. ServiceNow's ability to foster efficiencies is critical to organizations in a time of economic uncertainty and rising labor costs.
Will these improvements will continue to translate into gains for investors? As the stock price rises, long-term investors should take a closer look at this SaaS stock to see if it still offers them opportunities.
The state of ServiceNow
ServiceNow is a popular choice for companies looking to improve workflow automation. Its software, called the Now platform, sits atop a company's existing IT infrastructure, making it easy to implement.
From that point, it helps companies organize processes and automate them when possible. Such software is critical to improving efficiency across increasingly complex organizations that are coping with rising labor costs.
Moreover, a diverse set of companies use ServiceNow for multiple purposes. Among these examples is Stellantis, which uses it to manage supply chain, human resources, and finance operations. Pharma giant Merck applies the technology to streamline IT operations. Such examples speak of the versatility of the software.
Furthermore, these successes have made the Now platform a favorite among users. According to Gartner, the company has risen to No. 1 in several niches, including IT operations, the IT service market platform, and IT asset management. Such achievements show that ServiceNow gained a competitive advantage over its peers.
Not surprisingly, it also built generative AI functionality into its Now platform. This platform, called Now Assist, is a collection of AI-powered features that can support customer service, case management, application development, and other functions.
Customers seem to be capitalizing on ServiceNow's functionality more. Transactions involving more than $1 million grew 26% yearly in the second quarter, and the number of customers spending over $1 million annually with the company is now at 1,988.
How it fared financially
Perhaps the best indication of its continued success is its financials for the first half of 2024. During this time, ServiceNow earned $5.2 billion in revenue, a 23% increase from the same period in 2023. With the company keeping operating expenses in check, operating income grew 119% over that period to $572 million.
However, an $832 million tax benefit in the first half of 2023 gave net income a one-time boost that year. Hence, the $609 million net income for the first two quarters of 2024 fell 49%.
Nonetheless, analysts forecast revenue will grow by 22% this year and 21% in 2025, so revenue growth should remain robust.
Indeed, such anomalies do not seem to have worried investors, as the stock is up nearly 60% over the last 12 months.
That increase has boosted valuations, as the price-to-sales (P/S) ratio of 19 indicates that the stock is not cheap. Still, considering that ServiceNow's average P/S ratio over the last five years is 17.8, the stock could have room to grow from these levels.
Is it too late to buy ServiceNow stock?
Given the state of the company's business, ServiceNow's financials, and its valuation, it's likely not too late for investors to buy.
Admittedly, with the P/S ratio over its five-year average, investors should take a more cautious approach to adding shares, as bad news could derail the stock's growth for a time.
However, ServiceNow seems to have stayed ahead of its competition in multiple areas of the enterprise software industry. As more companies turn to ServiceNow to increase efficiency, long-term investors should continue to prosper along with the company.
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Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Merck and ServiceNow. The Motley Fool recommends Gartner and Stellantis. The Motley Fool has a disclosure policy.
