How ServiceNow Will Rescue Zoom

Jon Markman

Zoom Video Communications ((ZM) -Get Report) has a problem. It's too popular. It has grown so fast its systems are stretched.

Enter ServiceNow ((NOW) -Get Report), a fellow leader in the march toward digital transformation. On Thursday, it announced that Zoom will license its Now Platform to makes enterprise videoconferencing even easier.

ServiceNow makes software that helps businesses stitch together connections. Its cloud based, all-in-one Now platform connects the dots, while sidestepping legacy system pitfalls.

This is like slugger Giancarlo Stanton joining a Yankees team that already has super-slugger Aaron Judge. It’s almost unfair to competitors.

ServiceNow’s big advantage, beyond the caliber of the platform, is integration. It grew out of the digitization of business. Its software engineers developed protocols to help enterprise clients weave together diverse, and often warring, business units.

Fixing Zoom won’t be easy. It has grown so fast its systems are stretched. Getting the code on track and in synch will be like changing the engines of a 747 while it’s flying at full throttle.

Zoom is now handling 300 million daily meeting participants. Many of these avid Zoomers are on the network concurrently.

ServiceNow is working with Zoom software engineers to build integrated self-help tools for customers, a virtual agent system, and a remediation process for larger unresolved issues. Everything will happen natively on the Now platform., in real-time

It’s a big win for ServiceNow. Then again, the company is used to winning.

The Now platform has been a big hit with customers. The subscription renewal rate is 97%. Three out of every four companies choose to license more than one product. ServiceNow has two accounts with annual billing greater than $15 million, and 890 customers with billing in excess of $1 million. The Now platform is in use at 80% of the companies in the Fortune 500.

During 2019, that reach resulted in revenues were $3.3 billion, a 34% jump from 2018. Momentum, according to a corporate fact sheet, carried into the first quarter, as sales reached $995 million, up 34%.

Investors are rightfully excited the Zoom and ServiceNow are working together. Both firms are growing at light speed, and have wide reach into global corporate suites. However, the bigger story is why Zoom needs ServiceNow, and the services it will provide.

ServiceNow is the gateway to digital transformation.

Now connects employees, customers and every networked device into a single system. It connects customer service, human resources, IT and security. Development tools help customers build modular, automated applications to suit specific needs. And everything happens in real time.

Despite the ongoing pandemic, International Data Corp., the global IT research and consulting firm, forecasts the total addressable market for these digital transformation services will grow to $1.3 trillion during 2020, up 10.4% from 2019.

ServiceNow shares have risen to new highs as investors begin to understand its core growth story is enhanced by companies desperate to work together better during the strained environment created by the pandemic.

The stock trades at 79.5x forward earnings. The market capitalization is $81.8 billion. While all valuation metrics are rich, the company is a unique up-and-comer that deserves to be bought into weakness by long-term oriented growth investors.