We recently published a list of the 12 Best AI Stocks Leading the ‘Big Tech Race’ to $4 Trillion According to a Famous Wall Street Analyst. Since ServiceNow Inc (NYSE:NOW) ranks 8th on the list, it deserves a deeper look.
Wedbush Securities analyst Dan Ives has said in a fresh note that major tech giants are now running in a “race” to capture the $4 trillion AI market, calling GPUs the new “oil” or “gold” in the technology sector. Ives said that the AI “party” is just getting started and the clock is showing “9p.m. in a party going till 4 a.m. with the rest of the tech world now joining.” Ives thinks spending on GPUs and data centers is the “only game in town.” Ives thinks the “first wave” of AI benefited major technology giants leading the AI race, with the second, third and fourth “derivatives” beginning to show trickle-down effects on other companies.
In a separate investing event, Ives recently predicted that the AI-led bull run can last for another two to three years, saying in a year from now investors will be looking at $3 trillion to $4 trillion market caps for major tech companies.
“The tech bull market is just starting,” Ives reportedly said.
In his latest note Ives highlighted several stocks which he believes can benefit from the AI revolution. In this article we take a detailed look at these stocks and discuss their AI-related growth catalysts and see whether or not they are sound long-term investments. With each stock we have mentioned hedge fund sentiment. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A business executive discussing investment opportunities in a stock exchange office.
ServiceNow Inc (NYSE:NOW)
Number of Hedge Fund Investors: 90
Dan Ives of Wedbush in his fresh note identified ServiceNow Inc (NYSE:NOW) as one of the stocks that can benefit from the AI revolution.
Last month, Goldman Sachs published a list of stocks mutual funds were piling into in their “hunt” for AI stocks and diversification of portfolios. ServiceNow Inc (NYSE:NOW) made it to the list. Goldman Sachs segmented the AI product cycle into different phase. ServiceNow Inc (NYSE:NOW) falls in the phase 2 of the cycle, where companies actually deploy and incorporate AI into their products to bolster revenue.
ServiceNow Inc (NYSE:NOW) is a pick-and-shovel name in the AI space since it’s an IT service management company that helps companies manage operations, workflows and maintain IT infrastructure. It’s not easy to switch away from ServiceNow because of the complexity of operations ServiceNow Inc (NYSE:NOW) provides. Its renewal rate came in at over 90% as of the latest quarter. In the current year ServiceNow Inc (NYSE:NOW) is expecting revenue growth of about 22% while it sees 21% revenue growth next year. In the first quarter, ServiceNow Inc’s (NYSE:NOW) subscription revenue growth came in at 25% YoY. At the end of the quarter the company had $8.8 billion of cash and investments versus $1.5 billion of debt.
ServiceNow Inc’s (NYSE:NOW) moat in AI lies in its customized generative AI solutions. The company recently made a custom generative AI solution for a bank and it’s pipeline in this respect is strong. ServiceNow management talked about the strong demand for its AI products during Q1 earnings call:
Our Gen AI products were in seven of our top 10 deals, and we closed seven deals over $1 million in ACV in the quarter. We had wins at a second Wall Street Bank, a leading cybersecurity firm and many more, including a significant win for ITOM Pro Plus, which just launched in March. Turning to profitability. Non-GAAP operating margin was over 30%, approximately 150 basis points above our guidance, driven by the timing of marketing spend, OpEx efficiencies and our top line outperformance.
ServiceNow Inc (NYSE:NOW) management also said:
Iconic brands are adopting ServiceNow’s Now Assist AI as a standard for their GenAI roadmaps. This quarter, we expanded our long-standing partnership with Microsoft to include new Generative AI capabilities while also integrating Now Assist AI and Copilot into employee experiences, really exciting. Hitachi Energy is using case summarization with NowAssist for ITSM to resolve cases faster, saving millions. Equinix is the deploying NowAssist AI for HR workflows, aiming to increase agent productivity by 30%. ServiceNow at IBM are combining the power of the Now Platform with Watson X to increase productivity for IBM’s employees, customers, and partners. BNY Mellon and ServiceNow are exploring the utilization of AI and other leading technologies and IT service management helping to unlock additional value for the bank and its clients.
ServiceNow Inc (NYSE:NOW) also helps companies automate their workflows. As more and more companies seek cost optimizations using AI, they will turn to ServiceNow to achieve their goals. That’s why ServiceNow Inc (NYSE:NOW) has a goal to achieve over 20% subscription revenue growth over the next few years.
Lakehouse Global Growth Fund stated the following regarding ServiceNow, Inc. (NYSE:NOW) in its April 2024 investor letter:
“US-based software company,ServiceNow, Inc. (NYSE:NOW), provided another strong result, continuing its long and consistent track record of 20%-plus revenue growth combined with healthy profitability. Subscription revenues grew 25% year-on-year to $2.5 billion and free cash flow grew 47% year-on-year to $1.2 billion. The company’s core operating metrics were also impressive with remaining performance obligations growing 26% year-on-year to $17.7 billion (i.e. roughly 2x 2023 revenue) and renewal rates holding steady at 98%. Performance was evenly spread across segments, products, and geographies, with notable strength in the US federal government. The company now boasts 1,933 customers generating in excess of $1 million in Annual Contract Value (ACV), which is pleasing to see as it implies multiple solutions are involved and that the company’s platform model is increasingly resonating with customers. In our view, ServiceNow is one the highest quality software businesses globally as the combination of consistent growth at scale, robust free cash flow generation and a large addressable market make it a compelling opportunity.”
Overall, ServiceNow Inc (NYSE:NOW) ranks 8th on Insider Monkey’s list titled 12 Best AI Stocks Leading the ‘Big Tech Race’ to $4 Trillion According to a Famous Wall Street Analyst. While we acknowledge the potential of ServiceNow Inc (NYSE:NOW), our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ServiceNow Inc (NYSE:NOW) but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
