When it comes to the stock market, artificial intelligence (AI) has been a powerful catalyst. Since January 2023, the shares of Nvidia, Broadcom, and Super Micro Computer have risen by 615%, 165%, and 520%, respectively. This increase in share prices has forced the three companies to split their stocks.
Microsoft could be the next AI company to announce a split in 2024 (Nasdaq: MSFT) and ServiceNow (NYSE:NOW)Shares of both companies have risen 70% and 109%, respectively, since January 2023, and if the two companies follow the example of Nvidia, Broadcom, and Supermicro, they would become more accessible to public investors.
Historically, the company has outperformed the S&P 500. (SNPINDEX: ^GSPC) 12 months since announcing a stock split. But whether Microsoft and ServiceNow split their stocks or not, investors should do their due diligence before buying the stock.
1. Microsoft
Microsoft is the world’s largest software company and the second largest public cloud company. The company’s best-known products are its Windows operating system and Office productivity suite. However, the company also has a strong presence in business intelligence, communications, and enterprise resource planning software. Overall, Microsoft is projected to account for approximately 19% of all enterprise software revenue in 2024.
Microsoft has added generative AI assistants to its software portfolio to create new monetization opportunities. For example, Copilot for Microsoft 365 can draft text in Word and organize data in Excel. Morgan Stanley believes the strength of generative AI will help Microsoft gain market share in enterprise software next year. In the most recent quarter, the number of employees using Copilot for Microsoft 365 daily nearly doubled quarter-over-quarter, and the total number of customers grew by more than 60%.
Meanwhile, Microsoft’s Azure has been steadily gaining market share in cloud infrastructure and platform services, driven by strengths in cybersecurity and database solutions. It has also emerged as a pioneer in generative AI solutions, due to its status as the exclusive cloud provider for OpenAI. CFO Amy Hood said demand for Azure AI services again exceeded capacity in the June quarter. The company plans to increase investments in AI infrastructure in fiscal 2025.
Microsoft reported mediocre results for its fiscal fourth quarter (ended June 30), but topped expectations for revenue and profits. Revenue rose 15% to $64.7 billion, and generally accepted accounting principles (GAAP) net income rose 10% to $2.95 per share. Profits grew slower than revenue due to investment losses and interest expense. Azure revenue also grew more slowly than expected.
The story continues
Wall Street expects Microsoft to grow earnings at 14% annually over the next three years. At this consensus estimate, the current valuation of 34 times earnings looks rather expensive. Personally, I would avoid the stock until the valuation drops below 30 times earnings.
2. Service Now
ServiceNow provides workflow management software that helps businesses integrate and digitize processes across departments. The company’s core competency is IT software. It is a market leader in IT service management, IT operations management, and AI for IT operations software. However, analysts also rate the company highly for its solutions in customer service, low-code application development, and digital process automation.
These adjacencies create cross-selling opportunities, as well as the recent addition of a suite of generative AI tools called Now Assist. ServiceNow has been incorporating AI into its platform for years. Features like virtual agents, intelligent document handling, and predictive analytics make employees more productive. ServiceNow released its first generative AI tool in September 2023, and the suite continues to grow. Management said the company is “uniquely positioned to bring the full potential of generative AI to enterprises.”
ServiceNow reported strong financial results in Q2, beating expectations on both revenue and earnings. Revenue increased 22% to $2.5 billion and non-GAAP net income increased 32% to $3.13 per diluted share. Also notable was that contract renewal rates remained at 98% and remaining performance obligations surged 32%, suggesting strong revenue growth in the coming quarters.
Generative AI tools continue to gain traction among customers. In fact, Now Assist is the company’s fastest-growing product in history, according to management. In a recent note, Morningstar’s Dan Romanoff commented on this progress: “ServiceNow has seen such traction for several quarters against the backdrop of hesitation toward generative AI products from its peers, but we believe the company is clearly emerging as an AI leader.”
Wall Street expects ServiceNow to grow its adjusted earnings by 20% annually through 2025. This consensus estimate makes the current valuation of 64.5 times adjusted earnings look expensive. Personally, I’d be more comfortable buying the stock at a valuation closer to 45 times adjusted earnings.
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Trevor Jennewine invests in Nvidia. The Motley Fool invests in and recommends Microsoft, Nvidia, and ServiceNow. The Motley Fool recommends Broadcom and recommends buying January 2026 $395 calls on Microsoft and selling January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
The article Stock Split Prediction: Two Artificial Intelligence (AI) Stocks to Split, Following Nvidia, Broadcom, Super Micro was first published by The Motley Fool.
