Nvidia is one of the hottest artificial intelligence (AI) stocks on the market, but investors need to diversify their portfolios.
Hedge fund billionaire Dan Loeb compared artificial intelligence (AI) to the industrial revolution in a letter to clients last year. The Industrial Revolution was characterized by machines replacing human workers and a dramatic increase in economic output. AI promises similar step-function productivity improvements in nearly every industry.
“We have seen the evolution of AI, and we believe this technology has matured to the point where it is driving the kind of revolutionary technology platform change seen approximately every 10 years,” Loeb said. personal computers in the 1990s, the Internet in the 1990s, mobile in the 1990s, the 2000s, and the cloud in the 2010s.
This presents investors with a huge opportunity. The smartest way to profit is to own a basket of AI stocks. Many investors will naturally be drawn to the following: Nvidia (NVDA -3.44%), a company that provides chips that power cutting-edge AI systems.but ServiceNow (now -0.21%) At current prices, it's a more attractive AI stock.
Nvidia is a great company, but the stock looks expensive
Nvidia's graphics processing units (GPUs) are the gold standard for accelerating complex data center workloads such as artificial intelligence (AI). The company consistently achieves record-breaking results with his MLPerfs, an objective benchmark that measures the performance of AI hardware and software. moreover, wall street journal reports that “NVIDIA's chips power all of the most advanced AI systems, and the company's market share is estimated at more than 80%.”
Nvidia delivered incredible financial performance in the fourth quarter. Strong demand for AI solutions led to triple-digit growth in data center sales, with sales increasing 265% to $22.1 billion. Meanwhile, non-GAAP (Generally Accepted Accounting Principles) net income increased 486% to $5.16 per diluted share as gross margin expanded by more than 10 percentage points due to pricing power and growth in the software business. .
Looking ahead, Grand View Research predicts that spending on AI will increase by 37% annually through 2030. There's no doubt that NVIDIA will benefit from that tailwind. In fact, Wall Street expects the company to see revenue grow 27% annually over the next five years. However, its current valuation of 36.6 times sales looks expensive, according to its consensus estimate.
To be clear, I am not recommending that investors sell Nvidia. A great company with a history of cutting-edge innovation and excellent future growth prospects. However, I'm skeptical that it can deliver market-beating returns to shareholders from current prices. Therefore, investors should consider other AI stocks (like ServiceNow) for now.
ServiceNow is a leader in workflow digitization and automation
ServiceNow helps companies digitize and automate workflows across departments. Its platform addresses four main use cases:
- Technology workflows such as IT services and IT operations management
- Customer workflows such as field service and customer service management
- Workflow for employees such as HR
- Creator workflows such as software development and process automation
ServiceNow is best known as a leader in IT service management, but we also do consulting. gartner It is also recognized for its leadership in IT operations management and artificial intelligence (AI) for IT operations. Similarly, forrester research considers the company a leader in low-code application development, customer service solutions, digital process automation, and risk management platforms. These recognitions not only tell investors that ServiceNow is doing the right thing, but also drive potential customers to attractive products.
ServiceNow reported strong financial results in the fourth quarter. Total revenue increased 26% to $2.4 billion, the fourth consecutive quarter of accelerated growth. This trend is likely to continue in the future, as the remaining performance obligation (RPO), which measures sales pipeline momentum, has actually increased faster than revenue. Specifically, his RPO increased 29% to $18 billion in the fourth quarter.
Meanwhile, non-GAAP operating margin expanded approximately 150 basis points, and adjusted net income increased 36% to $3.11 per diluted share. This reflects disciplined expense management. ServiceNow also achieved a 99% renewal rate in the fourth quarter, up from 98% a year ago, suggesting high customer satisfaction.
ServiceNow has a tailwind in digital transformation and artificial intelligence
Going forward, digital transformation (DX) should become a major tailwind for ServiceNow. International Data Corp. predicts that DX spending will grow 16% annually through 2027 as companies digitize all types of processes to improve efficiency. ServiceNow is ideally positioned to benefit from long-term trends due to its leadership in a number of relevant markets.
Furthermore, generative AI should also be a major tailwind. ServiceNow introduced Now Assist last September, making it one of the first software companies to make generative AI available to customers. Now Assist is a suite of tools that lets you automate tasks and improve productivity across your IT services, customer service, human resources, and development teams. Bloomberg Intelligence predicts that revenue from generative AI software will increase by 58% annually through 2032.
ServiceNow CEO Bill McDermott commented on these tailwinds during a recent earnings call:
What we have here is a strong and durable market, fueled by once-in-a-generation long-term trends. ServiceNow has been able to catch this wave so quickly because we have spent years investing, innovating, and preparing for it. Artificial intelligence is injecting new fuel into an already powerful growth engine.
With this in mind, Wall Street expects ServiceNow's revenue to grow 20% annually over the next five years. In that context, the current valuation of 17.4 times sales is acceptable. Investors looking at a five-year horizon should feel comfortable buying a small position in this growth stock today.
