Artificial intelligence (AI) has been a powerful catalyst where the stock market is concerned. Since January 2023, shares of Nvidia, Broadcom, and Super Micro Computer have advanced 615%, 165%, and 520%, respectively. That price appreciation compelled all three companies to split their stocks.
The next AI companies to announce splits in 2024 could be Microsoft (MSFT 0.60%) and ServiceNow (NOW 7.58%). Their stocks have advanced 70% and 109%, respectively, since January 2023, and shares would be more accessible to the average investor if both companies followed the example set by Nvidia, Broadcom, and Supermicro.
Historically, companies have beaten the S&P 500 (^GSPC 0.11%) during the 12 months after announcing a stock split. But whether Microsoft and ServiceNow split their stocks or not, investors need to do their homework before purchasing shares.
NASDAQ: MSFT
Key Data Points
1. Microsoft
Microsoft is the world's largest software company and second-largest public cloud. Its best-known products are the Windows operating system and the Office productivity suite. However, the company also has a strong presence in business intelligence, communications, and enterprise resource planning software. Collectively, Microsoft is forecasted to capture nearly 19% of all enterprise software revenue in 2024.
Microsoft has added generative AI assistants to its software portfolio to create new monetization opportunities. For instance, Copilot for Microsoft 365 can draft text in Word and organize data in Excel. Morgan Stanley believes the strength in generative AI will help Microsoft gain market share in enterprise software in the coming year. The number of workers using Copilot for Microsoft 365 daily nearly doubled sequentially in the most recent quarter, and the total customer count increased by more than 60%.
Meanwhile, Microsoft Azure has steadily gained market share in cloud infrastructure and platform services due to strength in cybersecurity and database solutions. It has also emerged as an early leader in generative AI solutions due in large part to its position as the exclusive cloud provider for OpenAI. CFO Amy Hood said demand for Azure AI services once again exceeded capacity in the June quarter. The company plans to increase AI infrastructure investments in fiscal 2025.
Microsoft reported mediocre financial results in the fourth quarter of fiscal 2024 (ended June 30), beating estimates on the top and bottom lines. Revenue increased 15% to $64.7 billion, and generally accepted accounting principles (GAAP) net income increased 10% to $2.95 per diluted share. The bottom line grew more slowly than the top line due to investment losses and interest payments. Additionally, Azure revenue increased more slowly than anticipated.
Wall Street expects Microsoft to grow earnings at 14% annually over the next three years. That consensus estimate makes the current valuation of 34 times earnings look rather expensive. I would personally avoid this stock until the valuation dips below 30 times earnings.
NYSE: NOW
Key Data Points
2. ServiceNow
ServiceNow provides workflow management software that helps businesses unify and digitize processes across departments. Its core competency is IT software. The company is the market leader in IT service management, IT operations management, and AI for IT operations software. However, analysts have also praised its solutions for customer service, low-code application development, and digital process automation.
Those adjacencies create cross-sell opportunities, as does the recently added suite of generative AI tools called Now Assist. For years, ServiceNow has been building AI into its platform. Features like virtual agents, intelligent document processing, and predictive analytics boost worker productivity. ServiceNow released its first generative AI tools in September 2023, and the suite has continued to blossom. Management says the company is "uniquely positioned to bring the full potential of generative AI to the enterprise."
ServiceNow reported strong financial results in the second quarter, beating expectations on the top and bottom lines. Revenue rose 22% to $2.5 billion, and non-GAAP net income increased 32% to $3.13 per diluted share. Also noteworthy, the company maintained its renewal rate of 98%, and remaining performance obligation surged 32%, hinting at strong revenue growth in future quarters.
Generative AI tools continued to gain momentum with clients. In fact, Now Assist is the fastest-growing product in company history, according to management. In a recent note, Dan Romanoff at Morningstar commented on that development: "After several quarters of ServiceNow seeing this type of traction against the context of hesitation from generative AI offerings from peers, we think ServiceNow is clearly emerging as an AI leader."
Wall Street expects ServiceNow to grow adjusted earnings at 20% annually through 2025. That consensus estimate makes the current valuation of 64.5 times adjusted earnings look expensive. Personally, I would feel more comfortable buying this stock at a valuation closer to 45 times adjusted earnings.
