We recently published a list of 10 Best Innovative Stocks to Invest in According to Hedge Funds. In this article, we are going to take a look at where ServiceNow, Inc. (NYSE:NOW) stands against other best innovative stocks to invest in according to hedge funds.
Technology is a Big Deal, Strategist Highlights
The Magnificent Seven continues to grasp a sizeable market share of the market gains over the past few years. That said, investors and analysts are excited to see what this earnings period has to offer for the magnificent seven and how much of an influence they have on the market. On October 31, Christian Dery, head of macro strategy at Capital Fund Management, appeared in an interview on Yahoo Finance to discuss the impact of the magnificent seven on the market.
Dery suggested that these companies have grown to become large entities and their market capitalization often fluctuates by $2 billion to $400 billion on earnings events. Looking at the dispersion of the index, Dery adds that individual stocks within the S&P are very diverse and more independent, hinting towards a very low correlation in the index.
He adds that generative AI and LLMs are very different from the traditional software business. Therefore, the hyperscaling model that is conventionally taken from software can not be applied here. For every new customer in the software business, the marginal cost often goes down to nearly zero. However, if you look at the “tech incumbents”, they have to increase their capital expenditures to develop compute clusters and scale their operations, suggests Dery.
In 2023, the chips industry generated revenue of about $3 billion, reflecting that we are yet to find a killer use case or see results of generous AI spending. Dery adds that the market is more likely to be “discerning” on the path to profitability since companies are going to focus more on capital expenditures and projections for capital expenditures. He is particularly interested in the CapEx projections of the Magnificent Seven and shares that if they miss there could be a negative reaction among those stocks.
Dery reiterated that the market is yet to see the investments pay off multiple times but maintains his interest in capital expenditures by these companies playing out. While he is bullish on technological innovation and believes artificial intelligence is disruptive and a “big deal”, he fails to see viable results as of now. Dery also emphasizes that these companies are directing their investments to AI because they do not want to fall behind competitors, with no proper timeline for AI monetization.
That said, some companies are investing heavily in innovation and are at the forefront of a technological revolution.
Our Methodology
To come up with the 10 best innovative stocks to invest in according to hedge funds, we went over multiple similar rankings on the internet from credible financial websites. We then examined the hedge fund sentiment of each stock and picked the most popular ones. Our list is in ascending order of the number of hedge fund holders as of the end of Q2 2024.
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 team of software engineers at desks working on code for a cutting-edge cloud computing solution.
ServiceNow, Inc. (NYSE:NOW)
Number of Hedge Fund Holders: 97
ServiceNow, Inc. (NYSE:NOW) is a software company that helps companies manage digital workflows and operations using its cloud computing platform. The company’s Now Platform allows businesses to leverage AI to enhance productivity, automate workflows, scale for growth, and improve security.
In the third quarter of 2024, ServiceNow, Inc. (NYSE:NOW) generated $2.79 billion in revenue, a 22% increase from the same quarter in 2023. Of this, subscription revenue was worth $2.72 billion, representing a growth rate of 23%. The company attributes this momentum to customers doubling down on ServiceNow as a leading AI platform for operational efficacy and business transformation. The company itself is confident in its future performance as the demand for AI continues to grow.
During the quarter, ServiceNow, Inc. (NYSE:NOW) processed its largest AI release to date, the Now Platform Xanadu release. The release encompasses hundreds of new and improved AI capabilities and generative AI solutions for the telecom, media, technology, and financial services industries. In addition to that, the company also partnered with NVIDIA to co-develop AI agents using Nvidia’s blueprints in the ServiceNow platform. To align with its expansion strategy, ServiceNow, Inc. (NYSE:NOW) also forged separate partnerships with Siemens, Rimini Street, and Pearson to develop AI use cases for different industries and customer segments.
Overall, ServiceNow, Inc. (NYSE:NOW) is an investor favorite because of its quality deals with major players in the industry. Similarly, the company has high growth expectations for the full fiscal year and the fourth quarter of 2024, contributing to its ranking as one of the best innovative stocks according to hedge funds.
Ithaka Group’ Ithaka US Growth Strategy stated the following regarding ServiceNow, Inc. (NYSE:NOW) in its Q3 2024 investor letter:
“Founded in 2004, ServiceNow, Inc. (NYSE:NOW) has become the leading provider of cloud-based software solutions that define, structure, manage and automate workflow services for global enterprises. ServiceNow pioneered the use of the cloud to deliver IT service management (“ITSM”) applications. These applications allow users to manage incidents and to plan new IT projects, provision clouds, manage application performance and build applications themselves. The company has since expanded beyond the ITSM market to provide workflow solutions for IT operations management, customer support, human resources, security operations and other enterprise departments where a patchwork of semi-automated processes have been used with varying success in the past. ServiceNow’s stock appreciated in the quarter on the back of strong earnings that beat Street estimates on the top and bottom line, with the company pointing to strength in subscription revenues, cRPO, operating margins, and continued demand for the company’s AI products.”
Overall, NOW ranks 9th on our list of best innovative stocks to invest in according to hedge funds. While we acknowledge the potential of NOW to grow, our conviction lies in the belief that certain AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than 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.