ServiceNow (NOW - Get Report) has had a terrific year-to-date performance. Even with the muted market response to its Q2 2019 earnings, ServiceNow's shares are up 60% so far in 2019, outperforming the S&P 500's (SPY - Get Report) near 20% gain.
During ServiceNow's earnings call, a strong vision for the company was laid out. However, investors are being asked to pay up for this quality company.
Strong Vision Ahead
ServiceNow makes employees' workloads easier and more convenient. As large and small businesses continue their digital migration to cloud-based platforms, ServiceNow is a clear beneficiary in this fundamental shift.
The biggest highlight from ServiceNow's earnings call on Wednesday had to be further details of its landmark partnership with Microsoft (MSFT - Get Report) -- a clear vindication of its business model.
The news was announced earlier in the month, which is probably why the market did not meaningfully react. But investors with a short-term focus on quarterly earnings could be missing out and underpricing what this venture brings to ServiceNow.
The partnership gives ServiceNow access to Microsoft's wide distribution networks. The partnership aims to leverage Microsoft's (MSFT - Get Report) Azure highest-level security clearance IL-6, to allow classified data, such as national security information, to work seamlessly between the two platforms.
The Numbers Back the Narrative
The above graph is remarkably boring.
It demonstrates just how steady and consistent ServiceNow's top line continues to grow. With its top line consistently growing higher than 30% year over year, it is the envy of many of its peers.
Going forward, as data loads continue to increase in variety, velocity and the volume, it is reasonable to expect this increased complexity will force bigger players (such as ServiceNow) to seek out niche players as bolt-on acquisitions.
Over the past three years, ServiceNow's acquisitions have been largely immaterial. This exemplifies that ServiceNow has not opted to squander shareholder capital through inorganic growth.
Presently, ServiceNow is opting to carry on its balance sheet close to $1 billion of net cash. This rock-solid financial position offers ServiceNow both the flexibility and dry powder to deal with any inevitable mishaps in execution.
Valuation: High Quality, Premium Price
Evidence of ServiceNow's high-quality offering can be ascertained by the fact that its customer churn rate is frequently between 1%-2%, which is close to negligible.
Moving on, the table that follows is insightful. It offers a brief snapshot of ServiceNow and its peers.
We can see how the group as a whole is being priced with extended multiples relative to their historical averages. Each one of the companies has seen their P/Sales multiple increase during the past few years.
These higher multiples are understandable, given the plethora of data showing that this sector's overall growth is showing no signs of slowing down any time soon. Accordingly, investors have come to positively embrace all cloud players, without any attempting to discern which one has the most staying power.
The race is not always to the swift, nor the battle to the strong, but that is the way to bet. Accordingly, despite the elevated multiples investors are being asked to pay for ServiceNow, given its consistent above-average performance, investors wishing to participate in the rapidly growing cloud space might as well seek one of the best players.
The Bottom Line
On the one hand, ServiceNow's focus on developing out-of-the-box capabilities to empower new employees to get up to speed fast and get productive quickly is showing no signs of slowing down any time soon.
On the other hand, for investors wishing to participate in ServiceNow's vision, they are being asked to pay up for its shares.