As we currently face market headwinds impacted by rising inflation and high interest rates pressuring high-growth companies, investors are on the hunt for established players with improved profitability and large market opportunities that benefit from automation and continued digitization. According to Harvard Business Review and Korn Ferry, America’s talent shortage has reached unprecedented levels exacerbated by the COVID-19 pandemic and aging demographic. Korn Ferry reports that, by 2030, more than 85 million jobs could go unfilled because there aren’t enough skilled employees to take employment. To stay competitive, companies are building their own recruiting teams by partnering with academic institutions and offering large signing bonuses to rebuild their workforce. Another emerging approach is to provide advanced workflow solutions to automate certain tasks with minimal human intervention.
ServiceNow, a market leader in digital workflow solutions powered by AI, is one of the biggest beneficiaries of this ongoing shift in digital transformation and automating business tasks across the organization. The company has a $93 billion market cap1 and a strong position in the IT service management and security market, as well as growing solutions for financial and human resource management. Its stock has fallen nearly 30% year to date, but the company has delivered organic growth in revenues and earnings by 25%+ consistently over the past several years.1 It is clear that ServiceNow’s focus on execution and building out its AI capabilities with technology tuck-in acquisitions over the past 10 years has been validated.
According to IDC, digital transformation represents a $10.7 trillion opportunity through 2025 while research firm Gartner forecasts global software spending will increase by double digits in 2022. ServiceNow continues to be on a growth trajectory, delivering on record deals as the strong momentum of its platform is clearly accelerating with over 70 million users now using its software. As ServiceNow states, the “pace of digital technology investment is accelerating.”
Represented in both our Robotics & Automation ETF (NYSE: ROBO) and Artificial Intelligence ETF (NYSE: THNQ), ServiceNow has been a key holding in our portfolios that are designed to capture the leaders and innovators. It falls into the ROBO ETF Business Process Automation subsector and holds a 1.58% weight as of 4/18/22. In the THNQ ETF, you can find the company in the Network & Security subsector, holding a 1.39% weight. We believe that the best way to capture the growth we are experiencing today in digital transformation and in the future of work is through market leaders like ServiceNow, which is uniquely positioned to grow in any economic environment.
What Does ServiceNow do exactly?
ServiceNow was founded in 2004 by a seasoned management team that understood that enterprises were seeking to manage the talent shortage and overworked IT departments. The company developed an easy-to-use cloud platform that not only automated IT service updates, security, and operations management but also helped businesses prioritize important tasks. In the past 10 years, ServiceNow has been offering solutions outside of IT and has been expanding into wider enterprises. This shift in focus to get its platform more deeply embedded into every part of the enterprise network has been a success, and ServiceNow is aiming for $15 billion+ revenue run rate by 2026.
Specifically, ServiceNow has completely transformed. It is now offering HR, customer service, security, and general business applications that are more enterprise-centric. The company has spent years transforming its entire stack and sales strategy to speak to CEOs and CFOs, the decision-makers of business solutions. So when the pandemic hit, ServiceNow was better prepared than most as its software is a cloud-native service that allows its customers to develop and manage applications in the easiest way possible. This streamlines its business processes thanks to automation and eliminates the need for multiple data silos across the company. Customers – such as major corporations like UBS, Intel, and Morgan Stanley to name a few – can utilize the ServiceNow platform to run a variety of use cases across all industries, including recent customer wins at Nvidia, CVS Health, Google Cloud, and Johnson Controls. More than 80% of the Fortune 500 companies currently use ServiceNow’s solutions for their enterprise needs.
What does all this mean? Imagine, you run a company with quite a few different teams. The customer service team handles all customer inquiries. The HR team handles all employees' needs, and the programming team handles all big firm projects. Each of those teams uses a plethora of different software and programs to run their day-to-day tasks. Juggling all those applications can be (1) unnecessarily complicated and (2) time-consuming – both of which can result in higher operational costs. Many companies that had built “custom solutions” often find their internal applications become outdated by the time they launch, with little to no support. However, building with the ServiceNow platform provides real-time value and is continuing to improve, streamline, and advance over time.
For example, ServiceNow’s NOW Platform powered by AI automates and streamlines workflows to combine the customer’s applications into one dashboard. The customer’s tech architecture is now more organized, highly efficient, and cost-effective. The diagram below is the perfect way to envision what the NOW ecosystem looks like: a single, unified platform throughout the entire business – defining the modern IT architecture.
ServiceNow has demonstrated organic growth, maintained high margins, and improved profitability validating its sustainable business model. ServiceNow’s growth has been notably organic with its subscription revenue driving over 95% of growth. This growth is expected to be the driving factor in the years ahead as the company releases new products and in new verticals for upsell and cross-sell opportunities.
Customer Case Study
A good example of the huge impact ServiceNow is making in sectors like financial services is how it has enabled Experian to build a single platform while saving cost and improving employee churn and efficiency. Experian is a multinational consumer credit reporting company. It serves more than 100,000 clients and maintains data for millions of consumers across 37 countries. Experian was seriously struggling with incompatible processes, high operational costs, and disconnected systems.
By working with ServiceNow, Experian was able to standardize IT globally, reduce its time spent on resolving various issues by 50%, request faster approvals, and provide a more seamless delivery of its services.
Jonathan Hayes, VP Global IT Service Excellence, Experian IT Services explains, “Rather than simply finding replacement systems, we knew we had the opportunity to drive service transformation across the business. Choosing ServiceNow was a conscious decision to move away from standard tools and adopt a single platform to power the seamless delivery of services for every business function.”
The ROBO Global View
AI technology-driven improvements to productivity could drive corporations to invest in more capital- and labor-intensive projects, accelerating growth, improving profitability, and potentially expanding equity valuations. The broad applicability of AI to enterprises is a needle-moving technology for the global economy and a driver behind improving productivity and business efficiency. Companies like ServiceNow allow enterprises to focus on people and not processes, allowing manual tasks to be completed by AI-powered platforms. Solutions that can help retain key talent will be more important than ever in this unprecedented environment where labor shortage is getting worse and not better. We believe ServiceNow, a true leader and innovator in transforming the employee experience, is one of the most valuable software companies in the world.
1 CapitalIQ & ROBO Global, As of 4/25/22
International Data Corporation
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