UK investors have been aggressively buying S&P 500 growth stock ServiceNow (NYSE: NOW). Last week, it was one of the most bought shares on AJ Bell.
So what’s behind the sudden interest here? And could there be an opportunity for those who don’t own it?
What’s this company all about?
ServiceNow is an enterprise software company. While it’s not very well known, its software is used by the vast majority of large corporations (it serves 85% of the Fortune 500).
Its solutions enable firms to streamline and automate their business processes (across a range of departments including IT, HR, customer service, and security). Recently, it has been rolling out powerful AI solutions designed to reduce workloads for human employees and autonomously perform tasks.
Why are investors buying shares now?
I think there are a few reasons why investors are suddenly buying now. One is that the stock’s fallen a long way (down from $240 to $80) due to the software sell-off but is now showing signs of a rebound.
I think the rebound’s justified. That’s because this company’s solutions are really embedded in large organisations and I can’t see businesses suddenly ripping it out to design their own software.
Another is that some software companies are starting to show they’re benefiting from AI. An example here is Snowflake (which I hold).
Last week, it posted really strong earnings, in which product revenue was up 34% year on year due to high demand for AI solutions. As a result, its share price rose more than 35% in a day!
Good earnings and growing AI adoption
Speaking of earnings, ServiceNow’s most recent figures were strong. In April, it posted revenue growth of 22% for the quarter ended 31 March.
Notably, Now Assist (its AI technology) customers spending over $1m in annual contract value grew 130% year on year. So customers are clearly embracing the company’s AI solutions.
“Our AI growth is far exceeding even our own expectations, reinforcing our position as one of the fastest growing enterprise software companies ever.”
ServiceNow Chairman and CEO Bill McDermott
An attractive valuation
Finally, the valuation now looks quite reasonable. At present, the forward-looking price-to-earnings (P/E) ratio using next year’s earnings forecast is in the low 20s.
For a long time, this software stock had a P/E ratio near 50. So the valuation has come down a lot.
Worth a look?
Is this stock worth considering for a Stocks and Shares ISA or Self-Invested Personal Pension (SIPP) today? I think so.
There are risks around disruption from AI. There are also risks around its pricing model – if a large number of white-collar workers are replaced by AI, its licensing revenue (it has traditionally operated on a per-seat basis) could fall.
With the stock still down almost 50% though, I like the risk/reward set-up. A small position here could pay off in the long run.
That said, ServiceNow isn’t the only stock I like the look of right now. There could be even better opportunities to consider…
Should you invest £5,000 in ServiceNow right now?
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And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if ServiceNow made the list?
Edward Sheldon owns shares in Snowflake
