Stock Analysis on Net

ServiceNow Inc. (NYSE:NOW)

Present Value of Free Cash Flow to Equity (FCFE)

Microsoft Excel

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company asset base.


Intrinsic Stock Value (Valuation Summary)

ServiceNow Inc., free cash flow to equity (FCFE) forecast

US$ in millions, except per share data

Microsoft Excel
Year Value FCFEt or Terminal value (TVt) Calculation Present value at 13.54%
01 FCFE0 2,704
1 FCFE1 3,093 = 2,704 × (1 + 14.38%) 2,724
2 FCFE2 3,516 = 3,093 × (1 + 13.68%) 2,727
3 FCFE3 3,973 = 3,516 × (1 + 12.99%) 2,714
4 FCFE4 4,461 = 3,973 × (1 + 12.30%) 2,684
5 FCFE5 4,979 = 4,461 × (1 + 11.60%) 2,638
5 Terminal value (TV5) 286,513 = 4,979 × (1 + 11.60%) ÷ (13.54%11.60%) 151,815
Intrinsic value of ServiceNow Inc. common stock 165,303
 
Intrinsic value of ServiceNow Inc. common stock (per share) $806.35
Current share price $759.00

Based on: 10-K (reporting date: 2023-12-31).

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.


Required Rate of Return (r)

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Assumptions
Rate of return on LT Treasury Composite1 RF 4.43%
Expected rate of return on market portfolio2 E(RM) 13.60%
Systematic risk of ServiceNow Inc. common stock βNOW 0.99
 
Required rate of return on ServiceNow Inc. common stock3 rNOW 13.54%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

2 See details »

3 rNOW = RF + βNOW [E(RM) – RF]
= 4.43% + 0.99 [13.60%4.43%]
= 13.54%


FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

ServiceNow Inc., PRAT model

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Average Dec 31, 2023 Dec 31, 2022 Dec 31, 2021 Dec 31, 2020 Dec 31, 2019
Selected Financial Data (US$ in millions)
Net income 1,731 325 230 119 627
Revenues 8,971 7,245 5,896 4,519 3,460
Total assets 17,387 13,299 10,798 8,715 6,022
Stockholders’ equity 7,628 5,032 3,695 2,834 2,128
Financial Ratios
Retention rate1 1.00 1.00 1.00 1.00 1.00
Profit margin2 19.30% 4.49% 3.90% 2.62% 18.11%
Asset turnover3 0.52 0.54 0.55 0.52 0.57
Financial leverage4 2.28 2.64 2.92 3.07 2.83
Averages
Retention rate 1.00
Profit margin 9.68%
Asset turnover 0.54
Financial leverage 2.75
 
FCFE growth rate (g)5 14.38%

Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31).

2023 Calculations

1 Company does not pay dividends

2 Profit margin = 100 × Net income ÷ Revenues
= 100 × 1,731 ÷ 8,971
= 19.30%

3 Asset turnover = Revenues ÷ Total assets
= 8,971 ÷ 17,387
= 0.52

4 Financial leverage = Total assets ÷ Stockholders’ equity
= 17,387 ÷ 7,628
= 2.28

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 1.00 × 9.68% × 0.54 × 2.75
= 14.38%


FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (155,595 × 13.54%2,704) ÷ (155,595 + 2,704)
= 11.60%

where:
Equity market value0 = current market value of ServiceNow Inc. common stock (US$ in millions)
FCFE0 = the last year ServiceNow Inc. free cash flow to equity (US$ in millions)
r = required rate of return on ServiceNow Inc. common stock


FCFE growth rate (g) forecast

ServiceNow Inc., H-model

Microsoft Excel
Year Value gt
1 g1 14.38%
2 g2 13.68%
3 g3 12.99%
4 g4 12.30%
5 and thereafter g5 11.60%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 14.38% + (11.60%14.38%) × (2 – 1) ÷ (5 – 1)
= 13.68%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 14.38% + (11.60%14.38%) × (3 – 1) ÷ (5 – 1)
= 12.99%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 14.38% + (11.60%14.38%) × (4 – 1) ÷ (5 – 1)
= 12.30%