Artificial Intelligence (AI) has been a strong catalyst for the stock market. Since January 2023, shares of NVIDIA, BroadcomAnd Super-microcomputer rose by 615%, 165% and 520% ​​respectively. This price increase forced all three companies to split their shares.

The next AI companies to announce splits in 2024 could be Microsoft (MSFT 0.83%) And ServiceNow (NOW 1.88%)Their shares have risen 70% and 109%, respectively, since January 2023, and the shares would be more accessible to the average investor if both companies followed the lead of Nvidia, Broadcom, and Supermicro.

In the past, companies have S&P500 (SNPINDEX: ^GSPC) during the 12 months following the announcement of a stock split. But whether or not Microsoft and ServiceNow split their stock, investors need to do their homework before buying shares.

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 Office productivity suite, but the company also has a strong presence in business intelligence, communications, and enterprise resource planning. Overall, Microsoft is expected to generate nearly 19% of all enterprise software revenue in 2024.

Microsoft has expanded its software portfolio to include generative AI assistants to create new monetization opportunities. Copilot for Microsoft 365, for example, can compose text in Word and organize data in Excel. Morgan Stanley believes the power of generative AI will help Microsoft gain market share in enterprise software in the coming year. The number of employees using Copilot for Microsoft 365 daily nearly doubled in the last 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 its strength in cybersecurity and database solutions. The company has also established itself as an early leader in generative AI solutions, thanks largely to its position 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 investment in AI infrastructure in fiscal 2025.

Microsoft reported mediocre financial results in its fourth quarter of fiscal 2024 (ended June 30), beating estimates on both revenue and earnings. Revenue rose 15% to $64.7 billion and net income under generally accepted accounting principles (GAAP) rose 10% to $2.95 per diluted share. Earnings grew slower than revenue due to investment losses and interest payments. In addition, Azure revenue grew slower than expected.

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

2. ServiceNow

ServiceNow offers workflow management software that helps companies standardize and digitize processes across departments. The company’s core competency lies in IT software. The company is a market leader in IT service management, IT operations management, and AI for IT operations software. However, analysts also praise the company’s 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. ServiceNow has been integrating AI into its platform for years. Features like virtual agents, intelligent document processing, and predictive analytics boost employee productivity. ServiceNow released its first generative AI tools in September 2023, and the suite has continued to evolve. 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 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 is that the company maintained its 98% renewal rate and remaining performance obligations increased 32%, indicating strong revenue growth in the coming quarters.

Generative AI tools continued to gain importance among customers. According to management, Now Assist is the fastest growing product in the company’s history. In a recent statement, Dan Romanoff of Morningstar commented on this development: “After several quarters of experiencing this type of traction against a backdrop of reluctance to adopt generative AI offerings from competitors, we believe ServiceNow is clearly emerging as the AI ​​market leader.”

Wall Street expects ServiceNow to grow its adjusted earnings 20% annually through 2025. This consensus estimate makes the current valuation of 64.5x adjusted earnings look expensive. Personally, I would rather buy this stock at a valuation of around 45x adjusted earnings.