One of my favorite stocks, ServiceNow (NOW) , is run by one of my favorite CEOs, Bill McDermott. ServiceNow for those that wondered, but were afraid to ask is a provider of cloud-based software largely designed around workflow management through data consolidation (big data) easing pressures on the administration of everyday business management. Many readers will likely recall NOW was an original member of Jim Cramer's "Cloud Kings."
Bill McDermott succeeded John Donahoe as CEO at the end of 2019 and the firm didn't skip a beat when Donohoe moved on to run Nike (NKE) . McDermott moved over from a lengthy stint at the helm of SAP SE (SAP) . ServiceNow has consistently seen revenues grow from somewhere in the high 20%s to low 30%'s seemingly quarter after quarter, while earnings have grown consistently as well.
Seeking just a little bit more depth of knowledge, the company delivers its software through the internet as a service, providing solutions that help define, structure, manage and automate services for clients globally. The focus is on customer support, human resources, and security while enabling clients to create their own service-oriented business applications throughout the enterprise.
ServiceNow operates data centers in the U.S, UK, Australia, Brazil, Canada, Hong Kong, the Netherlands, Singapore, and Switzerland.
ServiceNow is set to report second-quarter earnings Wednesday, July 28 after the closing bell (just an FYI, that day is also Fed Day).
The average of 26 sell side analysts who cover this name is for earnings of $1.21 per share with the range spanning from $1.15 to $1.32. Revenues are projected to land around $1.36 billion. The range of expectations there spans from $1.29 billion to $1.38 billion. If central expectations were to be realized, this would be an EPS decline of 1.6% on revenue growth of 27%.
Keep in mind that NOW has beaten earnings EPS expectations for 13 quarters in a row by an average of 12.4 cents. The company has also beaten revenue projections for nine consecutive quarters. So, chances are that estimates are low for both metrics. Just basing probabilities on past performance.
Readers will note that these shares have formed an almost perfect "double bottom" pattern close to the top of the chart, above. The shares currently are trading almost precisely at pivot, which in this case would be the apex of the middle of the "W", so, $566.
The shares are technically overbought with a Relative Strength Index (RSI) reading of 71, having sustained the 70 level since mid-June as NOW rallied hard. The daily Moving Average Convergence Divergence (MACD) looks a little stretched as well.
Are the shares a little tired? They are expensive. About 100 times forward-looking earnings, but are they tired?
This is when we thank the heavens for pivot points. Why? Because we know that stocks either find resistance there, or get the "slingshot" treatment.
So, we have an expensive stock that appears overbought. Yet, I feel bullish based on the CEO, and really nothing more than a hunch that estimates are too low.
How on earth do I play this?
I am already long this name. Off of a $566 pivot, I can technically justify a $680 price target. Kash Rangan, a five-star analyst at Goldman Sachs, has a $695 target, so I am not even out in the woods by myself. I could use the 200-day simple moving average (SMA) as a panic point, currently at $518, so I can limit the risk to what should still be a healthy profit.
I think there is a risk of some sideways action going into earnings, but then the breakout I still want.
Let's work on setting that up.
Playing NOW Into the Numbers (minimal lots)
Already long the equity.
Add a bull call spread:
-- Purchase one July 30 NOW $570 call for roughly $23.
-- Sell (write) one July 30 NOW $590 call for about $15.
Net Debit: The spread bears a net debit of $8, and a maximum profit of $20, minus the net debit, a max net profit of $12.
Note: Liquidity in these options products can be thin. You may have to work in order to get an acceptable price.