We’re coming up on the six-month anniversary of a chat we had about how a tiny number can yield big profits.
Back on Oct. 27, I noted the roughly $3 trillion global information technology sector grew just 3.3% in last year’s third quarter.
But I went on to say if you find the right tech leader, then that aggressive company could grow earnings – and your stock profits – by a big multiple over that number.
I recommended to you a specific aggressive IT services company. In fact, I said that this profit powerhouse could double in price in as little as two years.
And already, it looks my thesis was almost right on the nose.
This company has actually exceeded my forecast. Since that last report, the stock is already up 43%, beating the S&P 500’s 5% return by eightfold during the period.
So, I’m doubling down on that profit prediction.
To show you why, let’s go through the five reasons this stock will double from here in just two years…
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This company’s incredible growth and huge investment returns all stem from the same basic idea we’ve been discussing for the last several years.
Simply stated, these days, every company is a tech company.
Companies just can’t be competitive without tech platforms that provide big productivity gains.
With that in mind, let’s look closer at ServiceNow Inc. (Nasdaq: NOW)…
The company formed in San Diego in 2004 when a group of techies and surfers banded together with a simple mission. They wanted to make the complex and all-consuming tasks of running an IT department easy to manage from the cloud.
Thanks to its intense focus on providing the best IT-as-a-service (ITaaS), ServiceNow has racked up an impressive list of clients and partners.
More than 800 members of the Forbes Global 2000 use ServiceNow products. Its list of partners runs so many pages long, I got tired of hitting the “show more” button on the firm’s website.
This tells me that ServiceNow has winner written all over it.
I’m really excited about this stock, so let’s run it through the five filters of Your Tech Wealth Blueprint for finding quality tech stocks.
Tech Wealth Rule No. 1: Great Companies Have Great Operations
These are well-run firms with top-notch leaders.
John Donahoe, who formerly headed up eBay Inc. (Nasdaq: EBAY), became CEO of ServiceNow a year ago. His track record at both firms is something tech investors have got to love.
As CEO of eBay from 2008 until 2015, he doubled sales to $18 billion. Even better, he increased the firm’s market value by 250%.
While that sounds great in itself, it’s only part of the story. Donahoe also ran PayPal Holdings Inc. (Nasdaq: PYPL). He was part of the team that spun off eBay’s payments arm as a standalone company in July 2015, and he ran it post-spinoff.
Since then, PayPal shares have doubled in value. It bears noting that in the year since Donahoe joined ServiceNow as CEO, the stock has nearly doubled.
Tech Wealth Rule No. 2: Separate the Signal From the Noise
To create real wealth, you have to ignore the hype and find companies with rock-solid fundamentals.
Had you listened to the media back on Jan. 26, you might have been tempted to dump this stock. That’s the day the recent correction began – and major news outlets started saying tech was destined to get slammed.
That steady drumbeat of negative news sure hit the broad market pretty hard – the S&P 500 remains down 7.5% from its recent high. But ServiceNow has gone on to post gains of nearly 12%.
This is the value of owning a quality growth stock during choppy times.
Tech Wealth Rule No. 3: Ride the Unstoppable Trends
Look for stocks in red-hot sectors because they offer the best chance for life-changing gains.
A decade ago, the market for IT services delivered via cloud platforms barely existed. But this year, global sales for this sector are projected to hit $127 billion. So, if even just 5% of that went to ServiceNow, its own sales would ramp up from $1.93 billion (in 2017) to $6 billion.
But ServiceNow isn’t resting on its laurels.
It’s getting into hot fields, like human resources, security, customer support, and business applications.
Tech Wealth Rule No. 4: Focus on Growth
Companies with the strongest growth rates almost always offer the highest stock returns.
Over the past three years, ServiceNow has grown its sales an average 41%.
This is an astounding figure and one of the best among cloud-centric leaders – and I can prove it.
Amazon.com Inc. (Nasdaq: AMZN) is not just the King of E-Commerce. It’s also the leading supplier of cloud-computing services. Over the past three years, Amazon’s cloud sales have grown by 26%.
That means ServiceNow is growing 60% faster than one of the world’s most valuable tech firms.
And the quality of the growth is also improving.
At the end of last year, high-margin, recurring subscription sales rose to 42% of total revenue. That’s a 16.6% improvement in more profitable sales in just four quarters.
Tech Wealth Rule No. 5: Target Stocks That Can Double Your Money
This is where we look at the firm’s earnings growth and see how long it will take to double profits. By doing that, we can figure out how long on average it should take for the stock to roughly double.
I’ve gone through the firm’s financials in detail, and I’m projecting earnings per share will grow by an average 66% over the next three years.
Bear in mind, that’s a very conservative estimate.
You see, over the past three years, the firm has had an average of 232% earnings growth. But to be extra conservative, I cut two-thirds off that rate, and came up with a compound growth rate of 77%.
Now we’ll use what I call my Doubling Calculator. Just divide the compound growth rate, which is 77%, into the number 72 to get our answer. When we do, we find ServiceNow shares should double in just over 11 months.
With a $29 billion market cap, the stock trades at roughly $166.
It has handily beaten the broad market over the past two years. During the period, it’s gained 172%, smashing the S&P 500’s 29% gains by 493%.
But don’t let that quick return scare you off this winner because there’s still plenty of upside ahead.
As you can see, it won’t take many stocks like ServiceNow to have a dramatic improvement on your portfolio.
And here’s another one…
Thanks to a confluence of events – including a major deal with a global device maker, a series of FCC approvals, and one of the world’s best patent portfolios – I think this tiny Silicon Valley company is poised for a 125,091% revenue windfall.
Just imagine what that could do to its share price – especially for investors who get in early, before this company’s technology starts hitting the market.