Shares of hosted software maker ServiceNow (NOW) fell $1.25, or 4%, to close at $27.72 on Tuesday, following a report of better-than-expected Q4 revenue and profit last night, and a forecast for revenue this quarter and this year that topped analysts’ estimates.
The Street today seemed to be caught between appreciating the company’s growth and wrestling with a valuation on the stock some see as too rich.
Citigroup‘s Walter Pritchard takes the former position, reiterating a Buy rating today and a $36 price target, writing that “solid billings growth” of 58% “and revenue guide should put to rest concerns over fundamentals [...] suggesting best-in-class growth continues.”
But Pritchard warns that investors shouldn’t count on profits from the company even though the break-even result from last quarter was better than the 5-cent loss the Street was expecting:
While EPS was breakeven vs. our $0.04 loss and (consensus loss of $0.05), the company signaled its intent to accelerate investment in the business, especially in building out sales capacity as it continues to view itself as capacity constrained. We note that prior to yesterday�s announcement, management had signaled that after the spike in hiring activity into and immediate following the IPO, hiring was likely to tail off. We therefore view the company�s intent to step up investment as a bullish signal.
On the other hand, Mizuho Securities USA’s Abhey Lamba reiterated a Neutral rating on the shares, and a $30 price target, writing that “Although we continue to like the story, we are waiting for a better entry point as valuation remains high and upcoming expiry of the stock lockup could create buying opportunity”:
At $31, NOW is trading at 48x our 2014E CFFO and 7x our 2014E billings [...] Based on our scenario analysis we believe the company�s revenues could range between $500 million and $1 billion in 3-4 years. It needs to be successful in becoming a platform of choice for IT applications to hit the high end of the range. In our view, it is too early to have significant confidence in the company�s potential to penetrate the platform opportunity. Additionally, the upcoming expiry of the stock lockup should create an overhang on the stock, which could create a buying opportunity. The company�s float could more than double over the next couple of months.
This afternoon, I had a chance to chat with ServiceNow CEO Frank Slootman.
Slootman told me the company’s “growth journey continues to play out” as the company has “more than doubled in size for eight years now.” He said the company is seeing its software, which ostensibly is meant to streamline the activities of an IT group of a corporation, is creeping into many other areas of its customers’ lines of business, such as human resources.
But I asked Slootman what he thinks about the complaints from some investors that the shares of hosted software companies, including both his own, but also shares of Salesforce.com (CRM), WorkDay (WDAY), NetSuite (N), and others, are way over-valued, especially given many make little or no profit at this point.
“This is a very fundamental change in the underlying architecture” of corporate applications, says Slootman. “There’s just a whole group of vendors who are going to displace, replace the older vendors” such as�Microsoft�(MSFT) and�Oracle (ORCL), he contends.
“At the rates of growth that we’re talking about here, the stocks will grow into these valuations at blistering speed. We are not trying to show a profit at all — we could be wildly profitable overnight if we chose to be.”
When I pressed the case, pointing out that for years, bulls said of Salesforce that it would grow into its valuation, and it hasn’t, he replied by re-asserting the primacy of top-line growth and market share growth at all costs.
“We are here to increase the values of our company. It’s not about making money per se, it’s about increasing the value of the enterprise — that happens through growth, that’s the currency. If you know that, you run the company for growth. I think our major shareholders understand that.”
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