Transcription
Hello everyone, I hope you are doing well. Welcome to this new episode where we will talk about Service Now, a company in the software sector, and more generally, we will talk about all the companies that are suffering from the narrative around artificial intelligence, which, if we listen to the narrative, will kill a lot of software and companies, etc. Even beyond software, we can think of companies like Meta, which are currently suffering from the narrative. So for today, we will talk a little about what the company does, look at the numbers, and then I will give a broader conclusion on the entire sector. For information, for members of the program and the community, I just made you a new quantitative video on five stocks this morning, and by the way, we did Service Now a few weeks ago, we also did projections. And for those who want to join us to have access to a community of investors with whom we exchange daily, where I post every day for almost a year now, where I also make my videos, share my purchases, etc., well, do not hesitate to join us, especially since it is without commitment. So after a month, you can either stay in the group or go back to YouTube, and it allows you to discover the work with very little friction. And if you also want the training part, well, you have the updated training available with the annual subscription, and we'll start with the video. And as usual, there is no investment advice. It's important, I repeat it every time, but I think each person must truly make their own decisions and know why they are buying any company in their portfolio or any investment for that matter.
So, Service Now is a SaaS cloud platform, meaning software as a service, which is designed as an operating system for businesses. Its goal is to automate and centralize workflow management internally. Originally, they specialized in IT tickets to solve problems, and today they have expanded to all departments: human resources, legal services, etc. In short, it allows for replacing emails and tracking Excel files that we might know even in small businesses, and interconnecting all services, including by integrating AI, since they are also getting into it. So, that's a little about the company's activities. Obviously, I invite you to read the investor presentations, the full documents, listen to management, etc., but we will talk about that again in the conclusion.
Regarding growth, if you look at the first quarter of 2026, we were still at +22%, which is quite impressive. And for 2026, they are announcing more than 22% revenue growth and 35% free cash flow margin. So, impressive, and on margins, more than 80% margin. After all, it's not surprising for software, but it's worth noting. We will look at the financial documents together, and then we can also look at some software.
So, as a reminder, all companies are suffering because the current narrative is that AI could replace these businesses, and we will discuss this again in the conclusion because I think the narrative is a bit exaggerated for companies. By the way, I'm not the only one who thinks so; even Jensen Huang, the CEO of Nvidia, has talked about it. We will discuss this again in the conclusion, but of course, to show you the graph, these companies have been talked about a lot because since their highs, they have corrected by more than 48% currently. At their lowest, they had corrected by more than 64%, and now they are up 45% from their lows. So, that's why these companies have been talked about a lot because they have fallen sharply in the stock market. Here you have the growth figures for the first quarter, and they are maintaining the 22% growth for the full year announced. Very good margins for this business. I will still look at the company's financial statements, knowing that I will be looking at the document live with you. I haven't specifically prepared the video. I like to discover documents together.
So, you see the significant increase in revenue between 2025 and 2026 over 3 months. If I look for cash and cash equivalents in the same way, you have it here, which is decreasing. They have slightly reduced their cash. I will also look for long-term debt. There is less debt than cash, so they could repay it instantly. That's rather good news. And regarding free cash flow, stock-based compensation is 547, cash from operations is 1670, and CAPEX investment is 141. So, despite reincorporating all stock-based compensation for employees and management, we still have positive free cash flow. If you calculate it by reincorporating around 1500 million dollars in revenue, and if we don't reincorporate, it's more like 1000 for revenue this quarter, because we are looking at a quarter. It was how much? You will find the 35% margins, in fact, that's why I'm looking at this, around 3000. So, there you have it, one-third, and you find your 35% margins. Impressive, and so, a balance sheet that is okay, that generates a lot of cash, and especially a business that has a lot of growth, you will see it here. Revenue, there you go. I don't know how to describe it other than it's quite an impressive exponential growth, and all the fear is whether it will slow down or not because of AI? In any case, that's the narrative. For now, we don't see it at all on a quarterly basis, and I think it's probably a bit exaggerated. That's it.
Okay, just the valuations, I'll quickly look at them with you. These are the stocks we looked at together in the school, and I'll put the valuations here. You see below the graph that I created for another company, but it's interesting, so I'll show it to you for this one too. You see the stock price that has fallen sharply, the price ratio, the price relative to revenue, which has dropped to 6 times revenue compared to more than 20 times about a year and a half to two years ago, and yet revenue continues to increase. That shows you how much there can sometimes be a disconnect. This graph makes me smile a lot. And if I show you the price relative to operating cash flow, and we can also take the price relative to free cash flow without reincorporating stock-based compensation, I'll show you. We are very, very low on the medians. Look, the median is 125 compared to 48 currently. If we don't reincorporate stock-based compensation, which remains high, but it was 33, and still low compared to revenue at 8 recently, 8.99, so let's say it bounces to 9 compared to a median of 15, so we are still practically twice as cheap as the historical average over the last 5 years, generally speaking. So, the company is still trading at low price ratios. I obviously invite you to make projections each time because this is the past. You have to project into the future, have future revenue growth, future margins updated in the present, as I do in many videos, and I obviously invite you to do the same for Service Now and any company to get a payable price. But just by looking at past valuations, well, we are still much cheaper than the historical medians.
This brings me to my reflection on software and AI: are they doomed? I won't talk about growth here, otherwise, it would be the end of the analysis, but I wanted to talk about growth again because I can imagine a scenario, and we discussed this together in a post, I can imagine a scenario where software can become, so to speak, more mature with a decrease in pricing power simply because there might be fewer barriers to entry for certain types of software. And then I will cite many companies in the conclusion to discuss this, perhaps a compression of margins or at least slower growth because there would be fewer barriers to entry because it becomes easier to code software with AI. And I think that's true, and that's why I will talk to you later about data, pricing power, and having unique software, and I think some software will suffer enormously from artificial intelligence. I don't think it's just a narrative. And so, if there is a decrease in pricing power, meaning lower margins, slower growth. If there is negative growth, then we're not even talking about it anymore, for me, the analysis is over. But I wouldn't be surprised to see compressed price ratios and never see them recover. Hence the fact that I am doing very conservative analyses on Service Now. I did a very conservative analysis when I created the spreadsheet. And in fact, the question I ask myself, we will see it together in the conclusion because I have software in my portfolio. I told you about it recently, I talked a lot about Meta. It's not exactly software, but they got caught up in the narrative around artificial intelligence because they invest a lot in it. So, Meta has suffered a lot. And I find that the valuation is low, as with Service Now. After all, there's the prep, everyone pays for it with the discount they want, but I can't say it's ultra expensive, especially when it was around 80-90. I told you about Zalo, I often talked about Dassault Systèmes, etc., and also Teleperformance, which worries me more, or Adobe, which we will discuss. And ultimately, for me, data will remain the key. Data, the fact that we are already established in companies and therefore have retention. But that's what I told you earlier in the video: okay, if we have retention, we might keep the revenue, but then we have to go find new clients and therefore be able to find clients because we have a competitive advantage. For example, I talked about companies like Zalo and Meta recently, for which, for me, AI is a huge advantage. Conversely, if I take Teleperformance, they will really have to integrate AI because otherwise, they will very quickly be disrupted by software that will simply handle customer management and call management for them. And for example, I take Adobe, which must not miss the AI turn. Personally, I use competing software, notably DaVinci Resolve for videos and now photos too. And so, they will have to manage to maintain this pricing power against companies that are creating competing software. And that's why I've often talked about Dassault Systèmes, which I find a bit expensive for my taste right now. I've already made videos about it. But Dassault Systèmes is already established in companies. They have SolidWorks, they have Catia, they have Enovia, they have an ecosystem, engineers who know how to use them. You need an interface to communicate. And the more specialized the software, the more it has private company data, and the more they can play on confidentiality, as I wrote here. The more they will benefit from this, or at least the more they will be protected while they implement AI tools. And for example, we know that Dassault Systèmes is working with Nvidia to integrate AI into Catia and SolidWorks.
So, to summarize, in the world of AI, you have software that will worry me much less and that I have in my portfolio, and others on which I will be much more worried. I already told you about Teleperformance, where they might succeed in making the transition and survive. But it's hard for me to be convinced, and ultimately, whether I have it in my portfolio or not will lead me to the questions I wrote below. Already, Service Now, to finish with them, they seem very established in companies with a lot of data, a lot of confidentiality, and for example, I often give this example of Airbus and Boeing. If you are an airline company, you have Airbus, Boeing, and some random aircraft supplier not yet known who is 20% cheaper, you don't take the risk, you buy Boeing, Airbus, or Bombardier, etc., for smaller planes. I also took the example of ASML. That was at the heart of my investment thesis last summer. If you are an electronic component manufacturer, if you are a foundry like Samsung, TSMC, etc., you buy the ASML machine that works, that you've known for a long time, or do you buy the new machine that nobody knows to save 15-20%? I see something similar with software. If you have software that works, that is known, that has proven itself, and that can answer this question, then why not go for it? And conversely, if you can't answer the question, it becomes more complicated. For example, I take Adobe. Personally, I don't really know how they will face competing software. Certainly, they are established in companies, they have very good retention, etc., but to attract new clients, personally, I'm not invested in them. And a few years ago, when I started my small business, I could have been a customer. And I didn't necessarily see things that made me go towards them more than another. Whereas conversely, for example, when I look at Dassault Systèmes, I can answer the question because I understand their software, I've used it, I see the competitive advantages, and that's what I'm telling you here: do I understand the company? And so, there's my answer, and there's the answer that each person will have regarding these companies. For example, when I look at Dassault Systèmes, I have an opinion. When I look at Meta and Zalo, I have an opinion. And when I look at Teleperformance or Adobe, it's harder for me to answer because I understand less. And I take Service Now. Well, it's a bit like Salesforce and all these software that help run businesses. These are not businesses that I understand enormously. That doesn't mean they are bad businesses. It means that when I answer the question "Do I understand the business? Have I listened to management? Do I understand what management is telling me?" Well, frankly, I've listened to the calls, for example, from Salesforce, from Adobe. I've listened a lot to Meta recently. Depending on the type of business, I understand more or less, and therefore I can have it in my portfolio more or less. And very good companies, by the way, like many of these companies I mentioned above, I think the SAS Apocalypse, the SAS Apocalypse, which is basically the apocalypse that has arrived for software, is an English word that has been popularized a lot. I think it has been exaggerated for quite a few stocks, and I'm not the only one who thinks so. Jensen Huang also talked about it, and there you go. When I look at Meta, Dassault Systèmes, Zalo, etc., everything must be paid for at the right price, of course. Even Service Now must not be paid for at any price. I think the fears are exaggerated, but for other software, I can't really convince myself. As I told you, I am much more confident in the qualitative aspects of Meta than in Teleperformance or Adobe. Dassault Systèmes, Service Now, etc. You have to change your own opinion. And if I tell you this, it's because the declines can last, and you have to be convinced of that.
So, there you go. This video is about which I wanted to come back to more generally on the competitive advantages of these companies. I don't think Service Now was that expensive, especially during the decline. Even currently, it is much cheaper compared to its historical medians. Obviously, I invite everyone to establish their own spreadsheets, etc., and especially to ask questions about the future, about growth. Could I include it in my portfolio? I haven't finished my research yet. That's the famous question here. Do I understand the company Service Now? For now, I don't understand it enormously, and so I have work to do on it. I find it difficult to buy a company without having done, so to speak, all the work of listening to management, etc. So, that's a bit about this video. I hope it interested you. I think many of these companies are at interesting prices, and we include them in our portfolio. In any case, when I say "we include," I mean what I do on the channel, I often talk about it, and yes, I'm eager to see how they will embrace AI, and those who don't will have a hard time, and those who do, I think there will be some great returns on investment. I wish you all a good day and see you very soon for the next episode.