Is ServiceNow Inc. (NOW) A Smart Long-Term Buy?

Baron Funds, an asset management firm, published its “Baron Opportunity Fund” first quarter 2021 investor letter – a copy of which can be downloaded here. A return of 0.88% was delivered by the fund’s institutional shares for the Q1 of 2021, below both its S&P 500 and Russell 3000 Growth Index that delivered a 6.17% and 1.19% returns respectively for the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.

Baron Opportunity Fund, in their Q1 2021 investor letter, mentioned ServiceNow, Inc. (NYSE: NOW), and shared their insights on the company. ServiceNow, Inc. is a Santa Clara, California-based software company that currently has a $99.9 billion market capitalization. Since the beginning of the year, NOW delivered a -8.00% return, while its 12-month gains are up by 42.78%. As of April 30, 2021, the stock closed at $506.37 per share.

Here is what Baron Opportunity Fund has to say about ServiceNow, Inc. in their Q1 2021 investor letter:

“We believe short-term focused investors and consensus often miss the longer-term strength and durability of growth and business-model efficiency (earnings and free cash flow margins) of truly special businesses. An example of this is ServiceNow, a SaaS-industry leader and pioneer, and a long-time Fund investment. As shown in the table below, over the seven years from March 2014 through March 2021, ServiceNow experienced eight multiple declines that averaged –32%, ranging from a low of –19% to a high of –52%.

But during that period, ServiceNow demonstrated compounding revenue performance and stronger operating leverage and FCF generation than expected by consensus. The table below shows the first quarter 2014 projections of one of the top software analysts on the Street, Keith Weiss of Morgan Stanley, versus what ServiceNow achieved.

As you can see, over this three-year period, ServiceNow beat revenue expectations by $315 million, or 29%, and generated FCF margins of 23%, trouncing estimates by $186 million, or 138%.The compounding effects of seven years of strong revenue growth and FCF generation drove ServiceNow’s share price to increase from $70.03 on March 5, 2014 to $500.11 on March 31, 2021, a 32% annualized return. A 7-bagger!

ServiceNow delivered these point-a-to-point-b returns despite the eight multiple pullbacks described above, including the one that occurred towards the end of the first quarter. The power of faster-for-longer, cash-generative business models.”

Our calculations show that ServiceNow, Inc. (NYSE: NOW) ranks 25th in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, ServiceNow, Inc. was in 96 hedge fund portfolios, compared to 82 funds in the third quarter. NOW delivered a -9.34% return in the past 3 months.

The top 10 stocks among hedge funds returned 231.2% between 2015 and 2020, and outperformed the S&P 500 Index ETFs by more than 126 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Here you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

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Disclosure: None. This article is originally published at Insider Monkey.