Champion Trader Spots Hidden Giant Enterprise Software Market

When a champion trader who generated 941.1% returns in 2020 spotlights a stock in an uptrend, it’s worth paying attention.

That’s precisely what happened when Oliver Kell shed light on ServiceNow (NYSE: NOW), a company that continues to dominate the enterprise cloud computing industry by automating and managing digital workflows.

In addition to the technical chart looking good, few investors fully appreciate the depths of its competitive moat and the power of its latest earnings performance.

Key Points

• Subscription revenue growth remains elevated alongside high renewal rates and large profit margins.
• ServiceNow’s deeply integrated, customizable platform creates high switching costs, building a lasting competitive advantage.
• The company’s international reach and sector diversification, coupled with AI, are set to drive future growth and increase its TAM.

Revenue Breakdown & Highlights

In its recent Q3 earnings, ServiceNow reported robust numbers, with subscription revenues up 23% year-over-year fueled by the company’s success in attracting new clients and cross-selling to existing ones.

Total revenues stood at $2.79 billion as the company’s powerful growth engine in cloud solutions continues to power forward,

Where the magic lies is in the renewal rates that remain above 98%, spotlighting the high customer loyalty.

This renewal rate, paired with a 30% year-over-year growth in annual contract value for deals over $1 million has led to highly profitable long-term contracts.

ServiceNow’s high-value contract growth is a clear marker that organizations see their platform as indispensable.

Analysts’ Forecasts Growth Beyond Consensus

According to consensus, ServiceNow’s revenue is expected to grow at a compound annual growth rate (CAGR) of 22% through 2026.

Firms like Morgan Stanley and Goldman Sachs reveal several critical data points often overlooked. For example, ServiceNow has increasingly leveraged artificial intelligence within its platform, a trend they believe will drive exponential value for clients.

Estimates indicate that automation and AI functionalities, specifically for workflow efficiency, could increase ServiceNow’s total addressable market (TAM) by at least 15% over the next three years.

They also forecast ServiceNow’s international revenues, currently constituting roughly 38% of total revenues, could soon reach parity with domestic revenues. Europe, in particular, is becoming a hotbed of growth thanks to strong demand in countries like Germany and the UK.

So too is the company diversifying its customer base, entering fields like healthcare, financial services, and government sectors, each with unique regulatory and operational needs. ServiceNow’s seamless integration with other enterprise software platforms has made it the go-to solution for sectors with strict compliance requirements. In essence, they enable secure automation without sacrificing control.

Platform Dependency Is An Unseen Moat

ServiceNow’s economic moat is its “sticky” platform that is viewed as a necessity within enterprise IT ecosystems.

Unlike many SaaS platforms, ServiceNow is not just a single-function tool but rather an all-encompassing infrastructure for digital workflow management.

This end-to-end nature builds a level of dependency that is extremely challenging to replicate, making it not only costly for clients to switch but also highly disruptive.

One reason it’s so sticky is the customizable modules that can interoperate with other enterprise systems, ranging from Microsoft and Google to SAP and Oracle.

This interoperability creates a strong network effect because the more integrated the ServiceNow platform becomes with other systems, the more difficult it is for clients to extract themselves without severe disruptions.

Few investors have spotted that ServiceNow’s extensive database of enterprise workflows provides an under-the-radar source of insights and predictive data analytics.

These analytics allow clients to optimize workflows and identify bottlenecks, giving the firm a competitive edge as a source of actionable intelligence. Analysts estimate that as the data analytics market grows, this capability alone could drive up to 8% of ServiceNow’s revenue by 2026.

Financial Health and Profitability

ServiceNow’s profitability metrics are a hidden strength. With a gross margin hovering around 79.1% and operating margins that have improved to 27%, ServiceNow outperforms many in its sector.

Its cash flow generation of $2.8 billion also ensures a strong cushion exists if economic headwinds are faced and makes it a lower-risk play in the high-growth tech space.

With all that said, the company’s success hinges on continued IT spending growth, which may  face slowdowns if macroeconomic pressures impact corporate budgets.

There is also the endless risk of competition from firms like Atlassian, Salesforce, and new entrants in AI-driven workflow automation.

ServiceNow’s Ecosystem Is Overlooked

All in all, ServiceNow’s market dominance in workflow automation, high renewal rates, and international make a strong case for future growth.

The company’s unique moat, reinforced by its deep platform integration and exclusive data insights, solidifies its status as a critical enterprise solution unlikely to be easily displaced.

Analysts expect double-digit revenue growth and expanding margins, backed by a massive addressable market bolstered by AI capabilities.

For investors on the hunt for a rare blend of stability and growth potential in the tech sector, ServiceNow stands out as a wide-moated giant, and it doesn’t hurt that a champion trader appears to be riding its coattails too.