ServiceNow Raises Guidance; FVE up to $630

Wide-moat ServiceNow NOW delivered strong results, including upside to revenue, remaining performance obligation, or RPO, and adjusted operating margin. We think third-quarter guidance is similarly good, as it came in better than our model and management remains upbeat about the pipeline in the second half of the year. In our view, the quarterly results reinforce our view that ServiceNow is benefitting from digital transformation efforts which are being pulled forward, as corporate IT infrastructures have often been exposed as insufficient in the current remote work environment. We believe results continue to support our thesis centering on the company’s land-and-expand strategy. ServiceNow continues to leverage its strength in workflow automation to penetrate existing customers more deeply in IT and more broadly with human resources and customer service-specific products.

After adjusting our model for results and guidance, we are raising our fair value estimate to $630, from $587. We see shares as modestly undervalued and believe there is upside to guidance in the back half of the year, as such the stock remains one of our top picks in software.

Subscription revenue of $1.330 billion grew 31% year over year as reported, while total revenue grew 32% to $1.409 billion, compared with FactSet consensus of $1.361 billion. The company had 51 deals in excess of $1 million. Further, ServiceNow boasts 1,201 customers generating in excess of $1 million in annual ACV, which typically means multiple solutions are involved. Deal sizes are rising as traction continues in large multiproduct deals that support customer service management and HR. Current RPO was $4.7 billion, which was up 31% year over year in constant currency. Around 20% of revenue comes from industries hit hard by the pandemic—and these customers continue to show a rebound in demand. We also note continued strength in Europe, which grew faster than North America.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.