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SUMMARY
Parkev Tatevosian, CFA, compares ServiceNow and Snowflake, analyzing their revenue growth, profitability, and valuation metrics. The discussion highlights recent market pessimism and concludes with a preference for ServiceNow based on intrinsic value calculations.
MAIN POINTS
- Introduction of Snowflake and ServiceNow as stocks trading below all-time highs and outline of comparison criteria.
- Review of three-year compounded annual revenue growth rates for both companies, noting deceleration and industry context.
- Comparison of cash flow from operations to sales ratios, including the impact of stock-based compensation and recent margin trends.
- Discussion of ServiceNow's business model shift to hybrid pricing and the potential risks and opportunities from artificial intelligence.
- Analysis of declining forward price-to-earnings ratios for both companies and market skepticism regarding AI integration.
- Presentation of discounted cash flow valuations and the conclusion favoring ServiceNow as the better current investment.
DETAILED ANALYSIS
Snowflake and ServiceNow are both prominent technology companies currently trading well below their historical highs, prompting investor interest in their potential as value opportunities. Over the past three years, both companies have experienced a deceleration in revenue growth, with Snowflake's compounded annual growth rate dropping sharply from 133% to 44%, while ServiceNow's rate declined from 48.5% to 22.4%. This slowdown is typical for maturing firms with expanding revenue bases, unless they introduce breakthrough products that reignite demand—a rarity in the sector.
Profitability was assessed using the ratio of cash flow from operations to sales, a metric chosen to account for the dilutive effects of significant stock-based compensation at both firms. ServiceNow currently leads with a 41% ratio, while Snowflake has shown notable improvement, peaking at 30% before settling at 26%. However, Snowflake's margin expansion has stagnated recently, attributed to increased infrastructure and sales force expenditures, particularly on data center resources like GPUs from Nvidia.
In contrast, ServiceNow has managed to continue expanding its ratio in the latest period.
Both companies face uncertainty from the rise of artificial intelligence and agentic AI solutions, which could disrupt their business models. ServiceNow is also transitioning from per-seat to hybrid consumption-based pricing, introducing additional risk. Despite management assurances that AI will serve as a tailwind, market sentiment remains skeptical, as reflected in sharply reduced forward price-to-earnings ratios for both stocks.
Snowflake's forward P/E has dropped from 65 to 36, while ServiceNow's has fallen from 35 to 13 over the past decade, signaling investor pessimism.
Discounted cash flow analysis reveals that both stocks are trading below their calculated intrinsic values for the first time in years. Snowflake is priced at $158 versus an intrinsic value of $164, a rare occurrence given its historical premium. ServiceNow, which has seen more valuation volatility, is currently at $95 compared to an intrinsic value of $137.
Given these factors, ServiceNow emerges as the preferred investment at present, offering a greater margin of safety relative to its intrinsic value.
LINKS
- YouTube channel membership for exclusive perks and early access.
- Special offer for The Motley Fool Stock Advisor.
- Parkev Tatevosian's book on evaluating publicly traded companies.
- Fiscal.ai investment research platform with viewer discount.
- Webull investing platform sign-up with bonus shares.
- Substack newsletter for monthly investing insights.