Artificial intelligence (AI) has rapidly become one of the hottest topics on Wall Street, shaking things up like nothing else. The stock market is buzzing with excitement as companies continue to ride the AI wave, with some investors already reaping the rewards. Just take Nvidia, Broadcom, and Super Micro Computer, which have seen their stock prices skyrocket by 615%, 165%, and 520% respectively since January 2023. Talk about serious gains!
With such incredible growth, it’s no wonder these giants decided to split their stocks, making them more accessible to average investors. Now, the big question is: which AI companies might follow suit? Analysts are keeping their eyes on Microsoft and ServiceNow, both of which enjoyed impressive stock advancements of 70% and 109% since the beginning of 2023. If these companies were to declare stock splits, the excitement would only grow.
But before rushing to invest, it’s worth noting the historical context: companies tend to outperform the S&P 500 within 12 months following stock splits. Despite the optimistic outlook, it's still wise to do your homework to avoid buyer’s remorse.
Microsoft’s AI Ascendance
Microsoft stands out as the world’s largest software company and has made its mark as the second-largest player in the public cloud space. Many people recognize its flagship products, like Windows and Office, yet Microsoft is more than just these household names. With its increasing involvement in business intelligence, communications, and enterprise resource planning software, it expects to capture nearly 19% of the total enterprise software revenue by 2024.
The buzz doesn’t stop there. The introduction of generative AI assistants to its software lineup, particularly with Copilot for Microsoft 365, has opened up fresh monetization avenues. This product allows users to draft text and organize data seamlessly, which has resulted in the daily usage of Copilot nearly doubling. With customer count surging over 60%, it’s clear Microsoft is onto something big.
Plus, Microsoft Azure is gaining significant traction. Thanks to its recent advancements and strong capabilities in cybersecurity and database solutions, Azure has positioned itself as a recognized leader. Notably, it is the exclusive cloud provider for OpenAI, making Microsoft not just another player on the field, but often the leading contender. CFO Amy Hood recently stated demand for Azure AI services exceeded capacity, signaling the need for more investment.
Though Microsoft reported decent financial results for the fourth quarter of fiscal 2024 with revenues up 15% to $64.7 billion, some say the bottom lines grew at a slower rate than expected. Still, Wall Street prowess remains buoyant, anticipating 14% annual earnings growth over the next three years. Despite this rosy outlook, the current price-to-earnings (P/E) ratio of 34 might seem steep. Many analysts believe waiting for valuations to dip below 30 would be more prudent.
The Rise of ServiceNow
ServiceNow is another intriguing prospect making waves in the market. This company specializes in workflow management software with significant expertise in information technology (IT) services. Analysts give ServiceNow high marks for its efficiency across customer service, low-code application development, and digital process automation as well. Its innovation continues with the launch of Now Assist, which offers generative AI tools to boost productivity.
The company’s latest financial performance reflects a bright future; ServiceNow reported 22% revenue growth to reach $2.5 billion for the second quarter. Their non-GAAP net income climbed by 32%, confirming the growing demand for their services. Notably, they maintained a remarkable renewal rate of 98%, and their remaining performance obligations surged by 32%, indicating promising future revenue.
ServiceNow cleverly incorporates generative AI tools, demonstrating dedication to innovation within its platform. According to analysts, the launch of Now Assist makes it the fastest-growing product they’ve offered, illustrating how well they’re capturing modern demands. With expectations of 20% annual adjusted earnings growth through 2025, some analysts find the current valuation at 64.5 times adjusted earnings on the pricey side. Many favor waiting for valuations to settle around 45 times adjusted earnings for better buying opportunities.
Investors Tread Carefully
The enthusiasm surrounding these AI stocks does come with caveats. Not everyone agrees on the readiness of these stocks for new investments. The Motley Fool’s recent analysis suggests caution, alerting investors to worthwhile alternatives. The list of ten stocks identified may present better investment opportunities, and it’s always good to explore various options.
Importantly, investing isn’t just about jumping on the next big trend; calculated decisions should underpin every purchase. Whether eyeing Microsoft or ServiceNow or considering other growth opportunities, investors should prioritize research and analysis to determine if the timing is right.
The excitement surrounding AI investments makes the stock market feel like the Wild West, where anything can happen with just one innovative breakthrough. Staying informed and being strategic can help investors navigate this high-stakes environment effectively. It all boils down to weighing the risks and rewards, and knowing when to jump onto the stock market carousel.
Overall, the AI sector presents enticing prospects wrapped up with potential volatility as the race continues. With giants like Microsoft and ServiceNow leading the charge, the future remains uncertain, yet filled with opportunity. Whether these stocks will yield long-term profits depends on broader market conditions and the successful delivery of innovations, making the next year one to watch closely.
