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Why ServiceNow may be worth $2 billion

June 19, 2012: 4:10 PM ET

How a sub-$100 million revenue company is worth $2 billion.

FORTUNE -- ServiceNow is audacious. The San Diego-based company, which provides cloud-based services to automate enterprise IT, has put itself on the IPO calendar for next week -- even though not a single company has managed to go public since Facebook's troubled offering on May 18. ServiceNow also wants to be valued at $2 billion, despite reporting less than $100 million in fiscal 2011 revenue.

The company yesterday filed to sell 11.65 million common shares at between $15 and $17 per share. That would give it a $1.9 billion market cap in the middle of its range, or around $2.05 billion were it to hit the $17 per share mark.

At first glance, that looks very pricey. ServiceNow has lost money over the past three quarters. Revenue has nearly doubled year-over-year, but still was just $92 million for its most recent fiscal year (which ended June 30, 2011). In other words, ServiceNow wants to be valued at more than 20x revenue. For context, Facebook's current market cap is just 18x 2011 revenue.

But here's why some close to ServiceNow think their math works: The company reported just over $47 million in Q1 revenue. If you multiple that times four, you get to approximately $190 million in 2012 revenue. Revenue grew by 125% between fiscal 2009 and 2010, and by 97.5% between fiscal 2010 and 2011. It also grew at more than 85% between Q1 2011 and Q1 2012.

So let's be conservative and say that revenue only grows by 70% for 2013. That would be $323 million -- meaning that a $2 billion valuation would be around 6x. That's certainly within an acceptable range for fast-growing SaaS models.

The only crimp in my math would be if ServiceNow shares rose substantially post-IPO, thus increasing the valuation multiple. But, if that happens, it's unlikely anyone will be complaining that the IPO price was too high.

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About This Author
Dan Primack
Dan Primack
Senior Editor, Fortune

Dan Primack joined Fortune.com in September 2010 to cover deals and dealmakers, from Wall Street to Sand Hill Road. Previously, Dan was an editor-at-large with Thomson Reuters, where he launched both peHUB.com and the peHUB Wire email service. In a past journalistic life, Dan ran a community paper in Roxbury, Massachusetts. He currently lives just outside of Boston.

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