03
Sep
2020

Share

ServiceNow: mission-critical, with no competition

The digital transformation of the enterprise is a long-term trend which is now accelerating as a direct consequence of the COVID-19 pandemic. Privileged business models operating with the benefit of this structural tailwind, therefore, should be considered carefully for an investment opportunity. ServiceNow is rare in that it operates a privileged ecosystem business model, built in software – which carries superior economics, delivering mission-critical building blocks required by the enterprise and has no meaningful competition today.

ServiceNow owns enterprise services

Thinking abstractly, the operations of any enterprise is simply a large collection of services. A service typically takes the form of human employees interacting with multiple software applications in a pre-defined manner (called a workflow).

In most large enterprises, these workflows are defined and delivered by ServiceNow.  The services that are delivered are measured, evaluated and optimised by ServiceNow. Unlike most software applications, ServiceNow is not trying to disrupt other enterprise application. ServiceNow is aiming to become the “operating system” of the enterprise – enabling employees to more efficiently deliver services across all functions, as illustrated below.

Importantly, all of ServiceNow’s applications (as well as those developed by third parties) are built on its Now Platform – a single platform, with a single data model on a technology stack owned by ServiceNow from the application layer all the way down to its datacentre infrastructure, located all over the world. It is one of the few technology businesses not reliant on the hyperscale cloud providers today.

Screen Shot 2020-09-03 at 1.03.41 pm

ServiceNow serves more than 6,000 of the world’s largest enterprises today, including Goldman Sachs, JP Morgan, Disney and even the US State Department. It consistently delivers a best-in-class 97 per cent retention rate. And interestingly, 80 per cent of its new business which drives its 30 per cent p.a. top line growth stems from existing customers – as they leverage the Now Platform more fully throughout the internal enterprise operations.

ServiceNow generates cash flows of the highest quality

There are three key reasons why ServiceNow’s cash flows are of the highest quality: (i) ServiceNow’s core workflow offering is mission-critical in the enterprise; (ii) ServiceNow operates with no meaningful competition; and (iii) ServiceNow extracts far less value than it adds.

To demonstrate the latter point, ServiceNow’s largest customers spend around $20 million per annum, far higher than the average ~$1 million per annum across all of its customers. But for these large customers, the $20 million annual payment to ServiceNow is in the context of an IT budget greater than $8 billion!

We believe ServiceNow extracts far less value than it adds. And the company believes this too, pointing out that for every $1 spent by a customer, roughly $5 of productivity gains are created. And in the context of an estimated $165 billion total addressable market (versus company annual revenues of just $4 billion today), one can see a very long runway ahead for growth.

Screen Shot 2020-09-03 at 1.04.11 pm

ServiceNow’s cash flows are of the highest quality because they are resilient, predictable and growing. And through this lens, there is genuine question to be asked about the appropriate discount rate that should be applied to the valuation of such cash flows – especially in the context of an interest rate environment that will very likely remain near zero for the foreseeable future.

ServiceNow’s advantage will extend with its data

Given ServiceNow’s complete ownership of its Now Platform across the entire technology stack, it owns a particularly privileged data set on the world’s largest enterprises from which it can (and does already) develop predicted AI-based tools to further enhance the value proposition of its applications for its enterprise customers.

For example, ServiceNow has only recently rolled out its AI-enabled virtual agents, predictive intelligence and performance analytics tools in its core IT service management product – and already 80 per cent of new customers are opting for this higher-value offering. But the existing customer base remain only 15 per cent penetrated today – a penetration level that ServiceNow confidently believes will evolve to 100 per cent over the coming years.

We seek to own the long-term winners in attractive markets. And we believe there is a very high probability that ServiceNow will remain a winner in enterprise services and workflows for decades to come.

We recently launched the ASX-quoted Montaka Global Extension Fund (ASX: MKAX). Investors gain access to Montaka’s method of picking long-term winners in attractive markets and expertise in differentiated short selling. To learn more, please join our webinar on Thursday 17 September 2020 at 6pm, Sydney-time. You can register here: MKAX: Compound your wealth with convenience

The Montgomery Global Funds and Montaka own shares in ServiceNow. This article was prepared 03 September with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade ServiceNow you should seek financial advice.

Our Funds

The Montgomery Fund

  • AUSTRALIA/NZ
  • Concentrated high conviction equities
  • From $25,000
Learn More

Montgomery Global Fund

  • GLOBAL
  • Concentrated high conviction equities
  • From $25,000
Learn More

Montaka Global Access Fund

  • GLOBAL
  • Access long/short global equity portfolio
  • From $50,000
Learn More

Montgomery Global Equities Fund (ASX:MOGL)

  • GLOBAL
  • Concentrated high conviction equities
  • No minimum investment - see your broker limits
Learn More

Montgomery Small Companies Fund

  • AUSTRALIA/NZ
  • Concentrated high conviction equities
  • From $25,000
Learn More
Close

Our Funds

Concentrated High Conviction Equities

Listed

Montgomery Global Equities Fund (ASX:MOGL)

Global
Available on the ASX as an Exchange Traded Managed Fund, invests in 15 to 30 quality global businesses for long-term capital growth with a target distribution yield of 4.5% per annum. Mirrors the strategy of the Montgomery Global Fund.
Unlisted From $25,000

Montgomery Global Fund

Global
Invests in 15 to 30 quality global businesses for long-term capital growth. Priced daily. Mirrors the strategy of the Montgomery Global Equities Fund (ASX:MOGL).
Unlisted from $25,000

The Montgomery Fund

Australia/NZ
Aims to provide long-term growth and income by investing in 20 to 40 high-quality Australian and New Zealand businesses trading at attractive valuations. Priced daily.
UNLISTED FROM $25,000

Montgomery Small Companies Fund

Australia/NZ
Aims to provide long-term growth by investing in 30 to 50 high quality, undervalued, Australian and NZ small and emerging companies with strong growth potential. Priced daily.
Unlisted from $1 Million

The Montgomery [Private] Fund

Australia/NZ
Seeks to deliver absolute returns from a portfolio of high-quality Australian and New Zealand businesses. Capital preservation is paramount. By invitation only.

Alternate Equity Strategies

New Fund

Montaka Global Extension Fund (ASX: MKAX)

GLOBAL
An ASX-quoted managed fund, typically, the Fund seeks to hold 15 to 30 long positions and partially offsets these with 10 to 40 short positions, operating with 130% exposure to its long portfolio and 30% exposure to its short portfolio, resulting in a net market exposure of around 100%. Features a target distribution yield of 5% per annum.
Unlisted from $50,000

Montaka Global Access Fund

Global
Aims to generate materially higher risk-adjusted returns, net of fees, than is generally available in the equities market over the medium term. Priced monthly. Provides retail investors access to the Montaka Global Fund.
Unlisted from $1million

Montaka Global 130/30 Fund

Global
Provides the opportunity to benefit from both the gains of extraordinary businesses and the declines of deteriorating businesses through a global equity active extension strategy, which has the potential to significantly outperform the broader equities market over time. Seeks to generate double-digit annual average returns, net of fees. Daily priced.
Unlisted From $1 Million

Montaka Global Fund

Global
Aims to generate materially higher risk-adjusted returns, net of fees, than is generally available in the equities market over the medium term. By invitation only.