ServiceNow (NOW) will probably never be a household name, but we’ve long thought of the company as an emerging blue chip in the software field, suggests Mike Cintolo, growth stock expert and editor of Cabot Growth Investor.
Instead of relying on emails, spreadsheets, forms and online messages to get things solved, ServiceNow’s platform provides structure to the various incidents, requests and tasks that occur every day in various departments. The software used to be targeted at IT departments but now spans the corporate spectrum.
The firm’s renewal rates have always been north of 95%, and in fact, customers generally buy more services as time passes and they realize the power behind ServiceNow’s platform. (Some 75% of customers take more than one product, up from 56% two years ago.)
The company’s growth has been extremely steady and rapid and, as we write later in this issue, the firm’s free cash flow should continue to mushroom for years to come.
As for the stock, NOW broke out of a multi-year base in late April and ran up into early July before consolidating for a few weeks. Shares have since pushed to new highs, and while volume has been just OK on the advance, we’re putting more emphasis on the stellar fundamentals.
In addition, we are looking at the stock’s early-stage position and the fact that it was one of the first to poke out to new highs over the past couple of weeks.
A decline into the mid-$100s would be a red flag, but we think the odds favor higher prices. We’re adding it to the Model Portfolio.
Mike Cintolo is vice president of investment and chief financial analyst at Cabot Heritage Corp.
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