Stock Split Prediction: 2 Artificial Intelligence (AI) Stocks to Split After Nvidia, Broadcom and Super Micro

Artificial intelligence (AI) has been a powerful catalyst in terms of the stock market. From January 2023, the shares Nvidia, Broadcomand Super Micro Computer advanced 615%, 165% and 520% ​​respectively. This price appreciation forced all three companies to split their shares.

The next AI companies to announce a spin-off in 2024 could be Microsoft (MSFT 0.83%) and Service Now (NOW 1.88%). Their shares have advanced 70% and 109%, respectively, since January 2023, and the stock would be more accessible to the average investor if both companies followed the lead set by Nvidia, Broadcom and Supermicro.

Historically, companies have won S&P 500 (SNPINDEX: ^GSPC) during the 12 months following the announcement of a stock split. But whether or not Microsoft and ServiceNow split their shares, investors need to do their homework before buying shares.

1. Microsoft

Microsoft is the world’s largest software company and the 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 projected 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 example, Copilot for Microsoft 365 can draft text in Word and organize data in Excel. Morgan Stanley believes that the power of generative AI will help Microsoft gain market share in enterprise software in the coming year. The number of workers using Copilot for Microsoft 365 on a daily basis nearly doubled sequentially in the most recent quarter, and the total number of customers grew by more than 60%.

Meanwhile, Microsoft Azure has steadily gained market share in cloud infrastructure and platform services due to the strength of its cybersecurity and database solutions. It also emerged as an early leader in generative AI solutions thanks 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 investment in AI infrastructure in fiscal 2025.

Microsoft reported lackluster financial results in the fourth quarter of fiscal 2024 (ended June 30), beating estimates on the top and bottom lines. Revenue rose 15% to $64.7 billion, and GAAP net income rose 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’s revenue grew more slowly than anticipated.

Wall Street expects Microsoft to grow revenue by 14% annually over the next three years. This consensus estimate makes the current valuation of 34 times earnings look quite expensive. I would personally avoid this stock until the valuation falls below 30 times earnings.

2. ServiceNow

ServiceNow offers workflow management software that helps companies unify and digitize processes across departments. Its core competence is IT software. The company is a market leader in IT service management, IT operations management and AI for IT operations software. However, analysts also praised its solutions for customer service, low-code application development and digital process automation.

These adjacencies create cross-selling opportunities, as does the recently added suite of generative AI tools called Now Assist. For years, ServiceNow has integrated AI into its platform. Features such as virtual agents, intelligent document processing and predictive analytics increase worker productivity. ServiceNow released its first generative AI tools in September 2023, and the suite has continued to flourish. 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 rose 32% to $3.13 per diluted share. Also of note, the company maintained its renewal rate of 98% and the remaining performance obligation increased by 32%, indicating strong revenue growth in the coming quarters.

Generative AI tools continued to gain momentum with customers. In fact, Now Assist is the fastest-growing product in the company’s history, according to management. In a recent note, Dan Romanoff at Morningstar commented on this development: “After several quarters where ServiceNow has seen this kind of traction against the backdrop of hesitancy from peers’ generative AI offerings, we believe ServiceNow is clearly emerging as an AI leader.”

Wall Street expects ServiceNow to grow adjusted earnings by 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.