2 Artificial Intelligence (AI) Companies Set to Split in Two

Stock splits are essential to the proper functioning of the stock market, even though they have no impact on the value of a company. Think of a company’s market capitalization (value) as a pie or a pizza, if you will. Splits simply create more shares; they don’t increase the size of the whole. However, they remain essential, especially for those that aren’t multibillion-dollar hedge funds. Microsoft (MSFT 0.17%) has split its stock nine times, most recently in 2003. A single share would cost $123,800 today without a stock split. That price is out of reach for many, if not most, investors looking to buy a single share. And, as you can see below, the price is once again very high.

MSFT data by YCharts

Splits also indicate that a company is booming, as the stock price must have increased significantly. Unlike Microsoft, ServiceNow (NOW 1.54%) has never split; however, with a stock price of $879, that could soon change.

Here’s why these companies are so successful.

Microsoft

The release of the generative chatbot ChatGPT has propelled the AI ​​race to the forefront of society’s and investors’ consciousness. When Microsoft invested billions of dollars in its creator, OpenAI, tech companies were racing to catch up. ChatGPT integrates with Microsoft Bing, which could allow Bing to steal market share from AlphabetGoogle Search, which generated $95 billion in revenue in the first half of 2024. Even small breakthroughs for Bing will generate billions of dollars in revenue.

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

Microsoft stock trades at 36 times earnings, which is higher than its three- and five-year averages of 33; however, the price-to-earnings (PE) ratio falls to 33 on a forward-looking basis. Given the high valuation, investors should not expect the price to skyrocket overnight. Still, Wall Street can justify the current price based on Microsoft’s AI opportunities.

ServiceNow

ServiceNow and Microsoft have been collaborating on a number of technology initiatives for years. The latest one integrates ServiceNow’s AI product, Now Assist, with Microsoft Copilot. Without getting too technical, the Now Assist product increases productivity in areas such as human resources, 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 wade through the transcript, allows agents to quickly search vast databases to find answers faster, and more. The increase in productivity is invaluable for businesses in a highly competitive world.

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

ServiceNow

ServiceNow is in a higher growth phase than Microsoft ($2.6 billion in sales on 22% growth last quarter), so sales rather than net income better represent its valuation. Its current price-to-sales ratio is 18, which is in line with its 5-year average. Looking ahead, the company expects subscription sales of $10.5 billion in 2024 and $15 billion in 2026. This means that the stock price could potentially return close to 50% by 2026 at the same valuation.

Microsoft and ServiceNow are making huge strides in AI, and with their stock prices soaring, splits could be on the horizon.