It hasn't been a great afternoon session for ServiceNow investors, who have watched their shares sink by -1.3% to a price of $557.33. Some of you might be wondering if it's time to buy the dip. If you are considering this, make sure to check the company's fundamentals first to determine if the shares are fairly valued at today's prices.
The Market May Be Overvaluing ServiceNow's Earnings and Assets:
ServiceNow, Inc. provides enterprise cloud computing solutions that defines, structures, consolidates, manages, and automates services for enterprises worldwide. The company belongs to the Technology sector, which has an average price to earnings (P/E) ratio of 27.16 and an average price to book (P/B) ratio of 6.23. In contrast, ServiceNow has a trailing 12 month P/E ratio of 77.7 and a P/B ratio of 16.44.
ServiceNow's PEG ratio is 2.21, which shows that the stock is probably overvalued in terms of its estimated growth. For reference, a PEG ratio near or below 1 is a potential signal that a company is undervalued.
Healthy Debt Levels and Exceptional EPS Growth:
| 2018-02-28 | 2019-02-27 | 2020-02-20 | 2021-02-12 | 2022-02-03 | 2023-01-31 | |
|---|---|---|---|---|---|---|
| Revenue (MM) | $1,933 | $2,609 | $3,460 | $4,519 | $5,896 | $7,245 |
| Gross Margins | 74.0% | 76.0% | 77.0% | 78.0% | 77.0% | 78.0% |
| Operating Margins | -5% | -2% | 1% | 4% | 4% | 5% |
| Net Margins | -8.0% | -1.0% | 18.0% | 3.0% | 4.0% | 4.0% |
| Net Income (MM) | -$149 | -$27 | $627 | $119 | $230 | $325 |
| Net Interest Expense (MM) | -$53 | -$53 | -$33 | -$33 | -$28 | -$27 |
| Depreciation & Amort. (MM) | -$114 | -$150 | -$252 | -$336 | -$472 | -$433 |
| Earnings Per Share | -$0.87 | -$0.15 | $3.18 | $0.59 | $1.13 | $1.6 |
| EPS Growth | n/a | 82.76% | 2220.0% | -81.45% | 91.53% | 41.59% |
| Diluted Shares (MM) | 171 | 178 | 197 | 202 | 203 | 204 |
| Free Cash Flow (MM) | $800 | $1,060 | $1,574 | $2,218 | $2,590 | $3,273 |
| Capital Expenditures (MM) | -$157 | -$249 | -$338 | -$432 | -$399 | -$550 |
| Net Current Assets (MM) | -$350 | -$423 | -$1,068 | -$1,359 | -$1,883 | -$1,613 |
| Long Term Debt (MM) | $630 | $662 | $695 | $1,640 | $1,484 | $1,486 |
ServiceNow has exceptional EPS growth, a pattern of improving cash flows, and healthy debt levels. However, the firm suffers from slimmer gross margins than its peers and weak operating margins with a positive growth rate. Finally, we note that ServiceNow has weak revenue growth and a flat capital expenditure trend and just enough current assets to cover current liabilities.
