CIS-VRM study tips - ServiceNow Vendor Risk Management Updated: 2024

© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

Someone forgot to tell ServiceNow (NOW 1.10%) that the cloud software industry has been slowing down in 2023. The digital transformation platform's revenue growth has actually been accelerating throughout the last year, and the stock has picked up steam as 2024 approaches. Shares of ServiceNow are up 80% in 2023 with just weeks left to go until the new year.

A high valuation has prevented many investors from pulling the trigger on buying this top cloud stock. After an epic run, is it still a top buy for 2024?

A next-gen platform for the future of work

ServiceNow provides numerous solutions for businesses to manage their workforce and customer experiences. Its platform spans digital workflow management tools, from AI that helps find bottlenecks that are slowing down the completion of tasks to cloud observability solutions that help with app performance.

ServiceNow landed on the radar of many investors this past summer after an expanded partnership was struck with Nvidia. ServiceNow said it would adopt Nvidia's latest and greatest AI systems to Excellerate its own platform, and in turn, Nvidia would expand its use of ServiceNow in its own workflow management for developing more powerful chips and generative AI systems.

This type of AI used to automate more employee tasks is powering "digital transformation" among big customers. In a year like 2023 where cost-cutting has been a top priority in the corporate world, it's helped keep demand high for ServiceNow's software. And, after the bear market of 2022, the company's revenue growth has been ratcheting up again.

Data source: ServiceNow. YOY = year over year.  

Even better, though, has been ServiceNow's rapid progress on profitability. Generally accepted accounting principles (GAAP) income from operations was $492 million in the first nine months of 2023, compared to just $200 million in the same period in 2022. Free cash flow (FCF) was $1.36 billion in the first nine months of 2023 (a healthy FCF profit margin of 21%), with the discrepancy between GAAP profitability primarily driven by employee stock-based compensation.

As for that employee stock-based compensation, ServiceNow management reported it repurchased $282 million worth of stock in Q3 2023. This is part of the company's first-ever stock repurchase program, which is aimed at offsetting the impact of dilution from ongoing employee stock-based compensation. About $1.2 billion worth of stock repurchase authorization remained at the end of the quarter.

Expect some turbulence, but a top cloud stock for the long term?

After the big run-up in stock price in 2023, ServiceNow trades for a high premium of 90 times trailing-12-month earnings per share, or about 60 times trailing-12-month FCF. Of course, part of the premium exists because ServiceNow's profit margins are expected to rise rapidly over the course of the next few years. To wit, shares trade for a bit more reasonable 55 times Wall Street analysts' expectation for 2024 earnings per share.

ServiceNow is nevertheless an expensive stock as we head into the new year. That can cause some turbulence in stock price, including steep sell-offs if ServiceNow misses some short-term financial estimates from one quarter to the next.

However, given the company's fast-and-steady growth for years, and leadership in cloud-based and AI-powered software, investors are rightfully optimistic about the business's trajectory. As I explained this time last year, I think a stock like ServiceNow is best bought in batches over the course of time, perhaps using a dollar-cost averaging plan. This still seems like the right strategy for those investors interested in the long-term potential (a decade and beyond) for ServiceNow.

I covered ServiceNow (NYSE:NOW) last January, concluding that the stock should reach $150B market cap over the next handful of years. Less than one year later, the stock is just about there.

This is yet another case study of the irrationality of the market herd. In July of 2022, sentiment on ServiceNow was extremely negative, as CEO Bill McDermott expressed concern in "macro crosswinds" and "elongated sales cycles". What has ServiceNow done since? In April of this year, it slightly reduced its long term guidance from $16B+ in revenue by 2026 to $15B+. The long term revenue trajectory should be the most important input for investors assessing the business' value. This should have been a negative revelation, yet the stock has soared as ServiceNow has outperformed near term expectations, raising current year guidance throughout the year.

ServiceNow is an easy business to get excited about. ServiceNow's early leaders determined the platform was far more useful beyond being a traditional IT help desk. ServiceNow is an entire workflow solution, meaning it can transfer information from one party to another in a variety of applications. In addition to IT service management, this includes managing IT operations and assets, employee requests, and customer requests. ServiceNow seems to perpetually discover new avenues where its platform can be useful, which gives investors more confidence in our year growth and performance.

ServiceNow has blasted past the organic revenue growth trajectories of behemoths like Salesforce (CRM), Adobe (ADBE), and Oracle (ORCL) by continuing to penetrate the world's best enterprise and government customers. ServiceNow had its best quarter ever for new government deals:

From an industry perspective, this was the best US Federal quarter in ServiceNow's history. NNACV was up over 75% year-over-year. US Federal agencies are standardizing on a single platform with a core set of end-to-end solutions. We had 19 federal deals over 1 million, including three deals over 10 million.

Our top deal in the quarter, the United States Air Force was the third largest deal in the company's history.

It's easy to be suspicious of CEOs like Bill McDermott that talk a big game, McDermott has repeatedly testified that his dream of making ServiceNow the defining enterprise software company of this century, but thus far, execution has been about as good as it gets.

McDermott has continually expressed customer centricity as the reason for ServiceNow's success. McDermott shared a colorful antidote at a recent investor conference of an experience running a retail business as a teenager:

I had built a video game room on the side of the delicatessen and I let the kids in 40 at a time. And to really amplify the importance of treating your customer well at the end of a long day, one of the young people said to me, Bill, when we want to have good food, be treated with respect and play video games, we come to your store and when we want to steal stuff, we go to 7-Eleven. It’s all about the customer, man.

The numbers back up McDermott's claims. As an example, in this chart shared at Investor Day each year, ServiceNow's customer cohort from 2010 is spending over 25x this year than they spent their first year as a customer:

It's hard not to like ServiceNow's fundamentals, it's even harder not to like its charismatic CEO. Sentiment ebbs and flows, the principles of valuation do not.

Valuation:

ServiceNow (along with the broader market) is just beginning to crest to new highs following the November 2021 peak and subsequent rate-driven sell-off.

As software valuations compressed in 2022, the debate over whether or not to classify stock-based compensation as an expense raged. It's become clearer that it should indeed be expensed, even if not a cash outflow. Here's why:

During the years ended December 31, 2022 and 2021, we issued a total of 2.7 million shares and 3.2 million shares, respectively, from stock option exercises, vesting of RSUs, net of employee payroll taxes and purchases from ESPP.

If we average out ServiceNow's stock price at the end of each quarter in 2022, we reach a price of about $592/share. Multiply this by 2.7 million shares issued, and this equals nearly $1.6B, or just slightly above the $1.4B stock-based compensation expense added back to free cash flow.

This is real value that has been transferred from shareholders to employees. In previous assessments, I may have been a bit too generous, valuing the business. This seemed to matter when valuations were falling, but investors have decided to turn a blind eye as prices have risen again.

ServiceNow trades at a steep multiple of 54x this year's FCF, 91x if excluding stock-based compensation. This compares to 80x and 216x at the peak of 2021, respectively. This is fuel for the bulls, the argument that multiples have significantly compressed at the same valuation because of significant growth.

Sticking To Principles:

It's easy to get drawn into ServiceNow's spectacular narrative and want to own the stock. But when the sky starts falling, as it periodically does in the financial markets, the sole source of conviction becomes very simple math.

The bulk of ServiceNow's value is locked up in distant future earnings. The fundamentals and management team are elite, but the possibility of a long period of underperformance after a huge rally is notable. New investors should consider waiting for a better entry point. It's very difficult to rate such a high quality businesses as a sell, but the valuation is stretched enough the investors should begin to consider the limits on their own risk tolerances if multiples continue to expand.

• Chris Bedi is ServiceNow's chief digital-information officer. 
• "We know we're early innings, especially with gen AI, but we are pushing on it hard."
• Bedi's insights are part of Business Insider's year-end leadership series, "Looking Ahead 2024."

For the cloud-software provider ServiceNow, this year's advances in artificial intelligence have opened a lot of doors.

The software-as-a-service provider is "aggressively pursuing our ambition to absolutely be an AI-first company," Chris Bedi, the chief digital-information officer at ServiceNow, told Business Insider. "We know we're early innings, especially with gen AI, but we are pushing on it hard."

The $140 billion company's cloud-based offerings include service management, operations management, and business management. And Bedi said he knows that if generative AI, or gen AI, is used correctly, it will save hours of work and help bolster the careers of workers using it.

Part of integrating and understanding AI is training ServiceNow's 22,000 employees. The company had its first AI learning day recently, which brought the whole company together. It included panels of both internal and external speakers to "demystify it a bit and give a learning path," Bedi said.

While ServiceNow focuses on gen-AI solutions and use cases, it also measures employee satisfaction. "Do they feel like it's actually additive to their job or is it kind of a nonstarter?" Bedi asked.

"Humans don't necessarily run to the technology — they sometimes run away from it," he said. "We're trying to move fast while we're bringing our human capital along."

Bedi said teams involved in IT, HR, and customer-support operations don't feel threatened by generative AI. "Their sentiment is around 64% of them believe it's helping boost productivity," he said.

The teams that heavily rely on gen AI are seeing "it's freeing up 25% to 30% of their time, but we're using that time so they can serve our clients better. So they're actually viewing it as a career progression for them."

The challenge that ServiceNow and all companies face is around fast innovation, "but also we take care of governance, safety, and ethics" around AI, Bedi said.

ServiceNow wants to "create better experiences because we all know experiences done the right way can drive the right behavioral and economic impacts." The company also said, "we shouldn't have any decision made without an accompanying AI-based recommendation," Bedi added.

Bedi's insights are part of BI's year-end leadership package, "Looking Ahead 2024," which digs into vision, strategy, and challenges across corporate America.

The following interview has been edited for length and clarity.

What are you looking forward to most for 2024?

I'll use one word: innovation. I think that there is so much technology capability available to CIOs and CTOs around the world, and just using all of it to innovate in a way that serves customers better, drives the company forward, frees employees up from the toil they've been in. That, to me, is going to be really fun.

What is your biggest concern for 2024?

I'll be the broken-record CDIO and say cyber. It's just not getting easier [protecting against cyber attacks and data hacks], it's getting harder. And so that's one thing, but also data [can also be manipulated] which then change algorithmic outputs, data labeling, wipeouts — stuff like that. I worry about threats which are yet to emerge.

What is one thing you think you got right in 2023?

We started experimenting and doing stuff with gen AI super early. And it's yielding benefit now because we're alive on like 15 things across five or six departments. So jumping on it early.

What is one thing you think you got wrong in 2023?

I would say underestimating how quickly gen AI would progress. It went a lot faster than I thought. It's amazing to think that it was just last November, December. And the speed has been amazing.

Tis the season for stressed-out kids — it's finals time for thousands of local high school students. Cynthia Muchnick is an educational consultant and the author of "The Everything Guide to Study Skills." Muchnick has three study tips to Excellerate performance and lower stress for students. thinking about forgetting important facts or a tricky math formula? Try writing it down on the test as soon as a teacher hands it out. "Or type it into their laptop if it's a laptop test. That way you have those formulas and short-term facts that their short-term memory might forget," says Muchnick. Next, manners matter. Encourage students to get in the habit of saying "thank you" to their teachers after class every single day. The simple habit creates a connection that makes tougher conversations easier to have. "These teachers are up there giving a presentation, teaching a class. Acknowledge and thank them for the time they put into that. It makes them like you more and think you're a kind person. I recommend that for your coach, for your teacher, for any mentor or adult in your life. Just say, thank you," Muchncik said.And finally, form a study group for finals. It's easier than ever with things like FaceTime and Discord. Ideally, it's great to find a student who has better mastery of the topic. Surprisingly, the benefits go both ways."Sometimes, being the one who really understands the material by reiterating it and teaching it to other students in your peer group helps you understand the information better and be better prepared for papers and tests," Muchnick said.

By Dean Seal

Cognizant has agreed to acquire Thirdera, the largest independent global pure-play ServiceNow consultancy, as part of the growth strategy for its strategic partnership with ServiceNow.

Professional-services-company Cognizant said Wednesday that the addition of Thirdera, which specializes in solutions related to the ServiceNow platform, would add 940 employees to Cognizant's ServiceNow Business Group.

ServiceNow announced this morning that it was acquiring Czech Republic task mining company UltimateSuite, giving the company a new way to capture and understand how work flows through a business. The companies did not reveal the price, but it was a three-year-old startup that had raised €768,000 (approximately $839,000), so likely not a huge number.

Task mining is a part of process mining, a growing worldwide market that helps companies understand how work flows through an organization, looking for bottlenecks in order to increase efficiency. Consider that Celonis, one of the leading startups in this space, has raised $2.4 billion and was valued at $13 billion as of October 2022. UltimateSuite is substantially smaller, having raised less than $1 million, but it gives ServiceNow another tool in its task mining arsenal, says Eduardo Chiocconi, VP and GM for process mining at ServiceNow.

Prior to acquisition of UltimateSuite, the company had the ability to drill down into a workflow, but lacked the ability to get down to the user task level. “And as we zoomed in and discovered where a specific inefficiency may be, we were lacking the ability to inspect or understand what individual users are doing. And that’s exactly what UltimateSuite task mining is coming in to help us with,” Chiocconi told TechCrunch.

He says it’s really about building more efficient business processes, and the addition of UltimateSuite is giving it greater capability to do that. “Insight without action has little value, so the idea is that as you find out exactly what needs to get fixed, then we also provide you on the same platform, the ability to automate some of those inefficiencies for better streamlining that end-to-end business process.”

The plan is to merge UltimateSuite functionality into ServiceNow’s process mining capabilities. “If you look at how ServiceNow been doing acquisitions in the past, we pride ourselves on organically surfacing these capabilities into our unified platform,” Chiocconi said. That means it won’t be sold as a separate product in the future. “Our whole objective is to bring more value to our customers by replatforming all this IP and know how that comes from UltimateSuite and surfacing it as an organic extension of process mining.”

This is the third acquisition for ServiceNow over the last several years involving AI and automation. It acquired AI-powered workflow tool G2K in May this year and Element AI, a Canadian startup at the end of 2020.