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Investors get excited about stock splits for two reasons. The most obvious reason is to lower a company’s stock price and make it easier to obtain stock. The less obvious reason is that they often spotlight strong companies. Specifically, forward stock splits are only necessary after stock prices have risen significantly, and they rarely occur in mediocre companies.
microsoft (MSFT 0.45%) and ServiceNow (now 0.30%) These are prime examples of the concept in action. Shares of both companies have risen 264% and 216%, respectively, over the past five years. In both cases, that price increase can be traced to strong financial results.
These gains make Microsoft and ServiceNow candidates for stock splits in 2024, but these two companies are worth investing in whether or not they split their stock. Here’s why:
1.Microsoft
Microsoft is best known for its Windows operating system, Office productivity software, SQL databases, Azure cloud computing services, and Xbox hardware and gaming content. In fact, while the company has a strong presence in each of these product categories, its most attractive growth prospects lie in enterprise software and cloud computing.
Microsoft dominates the Software-as-a-Service (SaaS) market, generating nearly twice as much revenue as its closest competitor. This success is due to the strength of our productivity, cybersecurity, and communications applications (i.e., Microsoft 365 suite) and enterprise resource planning applications (i.e., Dynamics 365 suite). To generate new revenue streams, the company launched Copilot, a generative artificial intelligence (AI) that automates workflows across these software products.
Meanwhile, Microsoft is gaining market share in cloud computing, thanks in part to its strength in artificial intelligence infrastructure and machine learning services. Microsoft Azure accounted for 24% of cloud infrastructure and platform services spending in the fourth quarter, up 2 percentage points year over year. Microsoft is well-positioned to maintain that momentum with its exclusive partnership with OpenAI. This will enable Azure clients to build custom applications using models such as his GPT-4, the cognitive engine that powers ChatGPT Plus.
Microsoft reported better-than-expected financial results for the second quarter of fiscal 2024 (ending December 31, 2023). Revenues rose 18% year-over-year to $62 billion, driven in particular by strong momentum in cloud computing. Meanwhile, non-GAAP net income jumped 26% to $2.93 per diluted share.
Looking to the future, SaaS revenues are projected to grow at 13.7% per year through 2030, and cloud computing revenues are projected to grow at 14.1% per year over the same period. With this, Microsoft can expect his low double-digit sales growth until the end of his 20s. In fact, Wall Street analysts expect the company to grow its sales by 14% annually over the next five years.
Based on this consensus estimate, the current valuation of 13.4x sales appears to be acceptable, albeit at a premium compared to the average sales of 11.5x over the past three years. Patient investors should consider buying a small position in Microsoft now, regardless of whether Microsoft splits its stock in the near future.
2.ServiceNow
ServiceNow helps companies digitize and streamline processes across different departments and software systems. Its platform consists of applications that address four main use cases. Creator workflow application development and workflow automation, such as (1) technology workflows such as IT service management, (2) customer workflows such as customer and field service management, (3) employee workflows such as human resources services, and (4).
ServiceNow is recognized as a leader in several related software categories, including enterprise service management, digital process automation, and low-code application development platforms for professional developers. In addition, the company ranks 19th on the 2023 Future 50 list, an annual report compiled by Fortune and Boston Consulting Group that ranks the world’s largest companies based on future growth prospects. did.
ServiceNow reported strong fourth quarter financial results. Total revenue increased 26% to $2.4 billion, and non-GAAP net income increased 36% to $3.11 per diluted share. Additionally, remaining performance obligations (contract revenue not yet recognized) increased by 29%, indicating strong sales momentum in the coming quarters. The company also achieved a 99% renewal rate in the fourth quarter, up from 98% a year ago, indicating high customer satisfaction.
Looking to the future, ServiceNow estimates its addressable market at $220 billion. The company is well-positioned to take advantage of the opportunity due to its strong presence in multiple software markets and investments in generative AI. In the words of CEO Bill McDermott, “Generative AI is injecting new fuel into an already powerful engine. ServiceNow’s intelligent platform for end-to-end digital transformation delivers significant productivity gains. We are driving a leap forward and explosive growth. This is a landmark moment.”
Wall Street expects ServiceNow’s revenue to grow 20% annually over the next five years. In that context, the current valuation of 17.6 times sales is acceptable, although slightly higher than the average price of 16.9 times sales over the past three years. Investors with a five-year horizon should feel comfortable buying a small position in this growth stock today, regardless of whether the company splits its stock in the near future.
Trevor Jennewine has no position in any stocks mentioned. The Motley Fool is affiliated with and recommends his Microsoft and his ServiceNow. The Motley Fool recommends the following options: His January 2026 $395 long call on Microsoft and his January 2026 $405 short call on Microsoft. The Motley Fool has a disclosure policy.
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