2 artificial intelligence (AI) companies that look ready to split up

Stock splits are essential to a functioning stock market, even if they don’t affect a company’s value. Think of a company’s market cap (value) as a pie or a pizza, if you prefer. All that splitting does is create more slices; it doesn’t make the whole bigger. However, they are still essential, especially for non-billion dollar hedge funds. Microsoft (NASDAQ: MSFT) has split its stock nine times, most recently in 2003. A single share would cost $123,800 today without the stock split. This price is unaffordable for many if not most investors to buy a single share. And as you can see below, the price is once again sky-high.

The split also indicates that a company is booming, as the share price must have risen significantly. Unlike Microsoft, Service Now (NYSE: NOW) never broke up; however, with share prices at $879, that could soon change.

This is why these companies are so successful.

Microsoft

The launch of ChatGPT’s generative AI chatbot pushed the AI ​​race into the center of society and investors’ consciousness. When Microsoft made a billion-dollar investment in its creator, OpenAI, tech companies were scrambling to catch up. ChatGPT integrates with Microsoft Bing, which could allow Bing to steal market share AlphabetGoogle’s search, which generated $95 billion in revenue in the first half of 2024. Even small inroads for Bing will generate billions in revenue.

Another major AI product is Microsoft Copilot. Copilot integrates into multiple products, answers questions, summarizes or generates text, creates images, encodes and analyzes data. According to Microsoft, 60% of the Fortune 500 use Copilots, a staggering number given the newness of the technology. These innovations have driven sales growth of 16% in fiscal 2024 to $245 billion. Operating income rose 24% to $109 billion, a whopping 45% margin.

Microsoft shares trade at 36 times earnings, which is higher than the three- and five-year average of 33; however, the price-to-earnings (P/E) ratio falls to 33 on a forward basis. Due to the high valuation, investors should not expect the price to rise overnight. Still, Wall Street can justify the current price based on Microsoft AI’s opportunities.

Service Now

ServiceNow and Microsoft have collaborated on many technology initiatives for years. It most recently integrates ServiceNow’s AI product, Now Assist, with Microsoft Copilot. Without boring you with too many technical details, the Now Assist product increases productivity in areas such as HR, IT support, customer service and more. For example, Now Assist saves customer service agents time by summarizing a customer’s recent interaction so the agent doesn’t have to go through transcription, allows agents to quickly search vast databases to find answers faster, etc. Increased productivity is invaluable to businesses in a highly competitive world.

About 85% of the Fortune 500 use ServiceNow. The chart below shows how much ServiceNow’s customer base has grown. Each year a customer adopts ServiceNow is represented by a different color, and the scale shows the increased revenue from those customers over time.

ServiceNow is in a bigger growth phase than Microsoft ($2.6 billion in sales with 22% growth last quarter), so sales rather than bottom line earnings better represent its valuation. The current price-to-sales ratio is 18, which is in line with the 5-year average. Looking ahead, the company expects subscription sales in 2024 of $10.5 billion and $15 billion in 2026. That means the stock price could return nearly 50% by 2026 by maintaining the same valuation.

Microsoft and ServiceNow are making huge moves in the AI ​​space, and with their share prices rising, a split could be on the horizon.

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Suzanne Frey, chief executive at Alphabet, is a member of the Motley Fool’s board of directors. Bradley Guichard has no position in any of the listed stocks. The Motley Fool has positions and recommends Alphabet, Microsoft and ServiceNow. The Motley Fool recommends the following options: long $395 January 2026 Microsoft calls and short $405 January 2026 Microsoft calls. The Motley Fool has a disclosure policy.

Stock-Split Watch: 2 Artificial Intelligence (AI) Companies That Look Poised to Split was originally published by The Motley Fool