We recently published a list of Jim Cramer’s Latest Portfolio: Top 10 Stocks in July. Since ServiceNow Inc (NYSE:NOW) ranks 5th on the list, it deserves a deeper look.
Jim Cramer in a fresh episode of “Mad Money” on CNBC said that while investing isn’t easy, it’s made even more difficult by “authentic Wall Street gibberish” and “arcane technology.” Cramer said that there’s an “entire industry” in Wall Street wanting people to think that investing is hard and “ordinary people” cannot do it on their own. Cramer said that many people in the financial industry are just “after your fees” and they aren’t interested in making money from original investing. Cramer said that hedge fund managers and mutual funds make investing look inaccessible and impenetrable.
Cramer said that he’s “pulling back the curtain” and emphasized that investing isn’t “rocket science” or “brain surgery” and you don’t need to go to a business school to understand it. Cramer pitched himself as a “coach” or a “translator” who can explain the meaning of complex financial terms to ordinary people.
“You can comprehend all the mystical-sounding vocabulary we throw around here as long as you have a translator, a coach like me, who can explain what the darn words mean.”
For this article we watched several latest programs of Jim Cramer aired on CNBC and picked 10 stocks he’s talking about. With each company we have mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
ServiceNow Inc (NYSE:NOW)
Number of Hedge Fund Investors: 90
Jim Cramer recently called a latest downgrade of ServiceNow Inc (NYSE:NOW) a “heresy,” calling the company “one of the greatest enterprise software companies of our lives.”
Cramer said that ServiceNow Inc (NYSE:NOW) CEO Bill McDermott “is money.”
“He’s said over and over again that they are actually making money with AI. I am not going to disagree with him.”
Goldman Sachs published a list of stocks mutual funds were piling into in their “hunt” for AI stocks and diversification of portfolios. ServiceNow Inc (NYSE:NOW) made it to the list. Goldman Sachs segmented the AI product cycle into different phase. ServiceNow Inc (NYSE:NOW) falls in the phase 2 of the cycle, where companies actually deploy and incorporate AI into their products to bolster revenue.
ServiceNow Inc (NYSE:NOW) is a pick-and-shovel name in the AI space since it’s an IT service management company that helps companies manage operations, workflows and maintain IT infrastructure. It’s not easy to switch away from ServiceNow because of the complexity of operations ServiceNow Inc (NYSE:NOW) provides. Its renewal rate came in at over 90% as of the latest quarter. In the first quarter, ServiceNow Inc’s (NYSE:NOW) subscription revenue growth came in at 25% YoY. At the end of the quarter the company had $8.8 billion of cash and investments versus $1.5 billion of debt.
ServiceNow Inc’s (NYSE:NOW) moat in AI lies in its customized generative AI solutions. The company recently made a custom generative AI solution for a bank and it’s pipeline in this respect is strong. ServiceNow management talked about the strong demand for its AI products during Q1 earnings call:
Our Gen AI products were in seven of our top 10 deals, and we closed seven deals over $1 million in ACV in the quarter. We had wins at a second Wall Street Bank, a leading cybersecurity firm and many more, including a significant win for ITOM Pro Plus, which just launched in March. Turning to profitability. Non-GAAP operating margin was over 30%, approximately 150 basis points above our guidance, driven by the timing of marketing spend, OpEx efficiencies and our top line outperformance.
ServiceNow Inc (NYSE:NOW) management also said:
Iconic brands are adopting ServiceNow’s Now Assist AI as a standard for their GenAI roadmaps. This quarter, we expanded our long-standing partnership with Microsoft to include new Generative AI capabilities while also integrating Now Assist AI and Copilot into employee experiences, really exciting. Hitachi Energy is using case summarization with NowAssist for ITSM to resolve cases faster, saving millions. Equinix is the deploying NowAssist AI for HR workflows, aiming to increase agent productivity by 30%. ServiceNow at IBM are combining the power of the Now Platform with Watson X to increase productivity for IBM’s employees, customers, and partners. BNY Mellon and ServiceNow are exploring the utilization of AI and other leading technologies and IT service management helping to unlock additional value for the bank and its clients.
ServiceNow Inc (NYSE:NOW) also helps companies automate their workflows. As more and more companies seek cost optimizations using AI, they will turn to ServiceNow to achieve their goals. That’s why ServiceNow Inc (NYSE:NOW) has a goal to achieve over 20% subscription revenue growth over the next few years.
Lakehouse Global Growth Fund stated the following regarding ServiceNow, Inc. (NYSE:NOW) in its April 2024 investor letter:
“US-based software company,ServiceNow, Inc. (NYSE:NOW), provided another strong result, continuing its long and consistent track record of 20%-plus revenue growth combined with healthy profitability. Subscription revenues grew 25% year-on-year to $2.5 billion and free cash flow grew 47% year-on-year to $1.2 billion. The company’s core operating metrics were also impressive with remaining performance obligations growing 26% year-on-year to $17.7 billion (i.e. roughly 2x 2023 revenue) and renewal rates holding steady at 98%. Performance was evenly spread across segments, products, and geographies, with notable strength in the US federal government. The company now boasts 1,933 customers generating in excess of $1 million in Annual Contract Value (ACV), which is pleasing to see as it implies multiple solutions are involved and that the company’s platform model is increasingly resonating with customers. In our view, ServiceNow is one the highest quality software businesses globally as the combination of consistent growth at scale, robust free cash flow generation and a large addressable market make it a compelling opportunity.”
Overall, ServiceNow Inc (NYSE:NOW) ranks 5th on Insider Monkey’s list titled Jim Cramer’s Latest Portfolio: Top 10 Stocks in July. While we acknowledge the potential of ServiceNow Inc (NYSE:NOW), our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ServiceNow Inc (NYSE:NOW) but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: Analyst Sees a New $25 Billion “Opportunity” for NVIDIA and Jim Cramer is Recommending These Stocks.
Disclosure: None. This article is originally published at Insider Monkey.