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ServiceNow: Buy on a Pullback

Various metrics indicate the company is on a roll.

It was a good first half of the year for ServiceNow (NOW), one of our core cloud-software holdings in our Vulture Portfolio, says Rob DeFrancesco, editor of Tech-Stock Prospector.

The company was able to beat revenue and EPS expectations in each of the two quarters, while at the same time raising guidance. Following the second quarter earnings report in late July, the stock hit a new all-time high of $115.85.

Since we added ServiceNow to the Vulture Portfolio in August 2014 at $55, the shares have advanced 99%. A more expansive product portfolio built up over the past few years has turned ServiceNow into a key partner for large enterprise customers seeking to move to the cloud and digitally transform their businesses.

In addition to the core IT service management (ITSM) component, customers know they can now count on ServiceNow to handle automation use cases across operations management (ITOM), human resources (HR), customer service and security.

Various metrics indicate the company is on a roll, even managing to accelerate revenue growth in the latest quarter after showing acceleration on the top line in Q1 as well. In Q2, revenue expanded 38% to $471.7 million, topping the consensus estimate by $10 million.

The HR and customer service offerings both were big second quarter contributors, particularly in terms of powering larger deals.

In HR, customers are increasingly looking to improve the employee on-boarding process.

Modernizing the new employee experience is now a key macro driver in HR. That’s a major positive for ServiceNow because the company’s solution automates mundane administrative tasks, giving HR pros more time to assist new employees.

In the customer service segment, ServiceNow’s sweet spot is helping customers automate how they handle and respond to large volumes of inbound inquiries (often service related issues or complaints).

ServiceNow’s solution helps users get to the root cause of why there are so many inbound calls. The goal is to automate how to respond to common issues and create as much self-help as possible, freeing up customer service agents to handle the most critical cases.

Wall Street responded favorably to ServiceNow’s latest earnings report. Canaccord raised its price target to $130 from $110, saying ServiceNow is developing into a next-generation platform vendor.

In boosting its price target to $132 from $126, RBC Capital called out ServiceNow’s healthy top-line growth, lack of intense competition and expanded use cases.

With revenue growth this year expected to come in at 37%, we remain quite bullish on ServiceNow. But don’t chase the stock from here. Accumulate shares on any sharp pullback.

Rob DeFrancesco is Founder of Tech-Stock Prospector.

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