ServiceNow - The investments are paying off

ServiceNow

ServiceNow (NOW:NYSE) is an American cloud service provider and specializes in the digitalization of workflows. The Now platform connects employees and systems in companies to optimize processes and workflows. With $3.5 billion in revenue and a market value of almost $100 billion, ServiceNow is a real heavyweight in the industry.

The stock has been running strong since 2017. During the Corona pandemic, it was able to gain significantly and thus continues its trend of 50% to 60% annual price gains over the last 4 years. There are good reasons for this increase as well as for the comparatively weak years from 2014 to 2017. Starting in 2010, the waters began to get somewhat rougher and ServiceNow invested massively in research and development. This was reflected early on in the margins, which were in a clear downward trend in 2014. The company invested significantly more than it earned and the margins were deep in the red in 2014.

 

 

In 2016, ServiceNow burned more money than ever before and the stock price behaved correspondingly volatile. With the 2017 annual report, however, a trend reversal became clearly apparent. The margins broke their downward trend and moved toward profitability. This trend break was confirmed, and over the past years the margins have consistently grown stronger. Return on equity and return on total assets have already entered the optimal zone, the cash flow margin has never left it, and as long as the trend of EBIT(DA) margins doesn't break, they too will be found in the Goldilocks range in the near future. Statistically, the most stable and highest price gains are to be expected here. So as long as the margins don't run downward again, there is no reason for the rally to end. Last week ServiceNow announced the annual figures for 2020. Revenue exceeded forecasts by a good 10%, profits exceeded expectations by double. Hardly surprising when looking at the margin development.

 

ATOSS Software

Atoss continues to show no signs of an end to the upward trend, but on the contrary offers once again an interesting setup for a tactical trade with stop-loss below the lows of the past week at ~169 €.

 

Nemetschek

Nemetschek has been struggling since our recommendation and repeatedly fails at the resistance zone above 60 €. Not an expression of strength and an unfortunate development. On the other hand, the lower boundary of the "wedge" still holds and the fast moving average is approaching quickly. The trading range is steadily narrowing. Pressure is building here and the decision for a strong movement in one direction or the other cannot be long in coming. A situation that, with strict loss limitation, leads to much potential with low risk.

 

Sartorius

For many months the highest-rated German stock once again confirms this assessment. After a brief breather since November including multiple confirmations of the old high in May, Sartorius is now accelerating again. Particularly noteworthy is the relative strength compared to the market at the end of the week.

 

Market Situation

A miniature correction of just over 4% last week led to latent panic in the media. The sentiment indicators are approaching buy signals, but haven't quite arrived yet. The smart money still kept its feet still on Friday. It would also be unusual to see large commitments after weakness before the weekend. It's not for nothing that people speak of "turnaround Tuesdays" and sometimes also Wednesdays or Thursdays. Fridays are often ignored, Mondays are often still waited out. The sentiment of retail investors is already very pessimistic. As many investors expect rising prices as falling prices, two weeks ago the expectation was still 60% bullish and only 30% bearish. So while further weakness is more likely at the beginning of the week, excellent entry prices could emerge mid-week. The market timing will reveal it.

 

Lars Wißler owns shares of ATOSS Software AG, Nemetschek AG and Sartorius AG. PWP Leeway does not own any of the mentioned stocks.