2 Artificial Intelligence (AI) Companies on the Verge of a Split

Stock splits are essential to a functioning stock market, even though they don't affect the value of a company. Think of a company's market capitalization (value) like a pie or a pizza, if you prefer. The split simply creates more pieces; it doesn't make the whole bigger. But they are still essential, especially for those who aren't billionaire hedge funds. Microsoft (NASDAQ:MSFT) has split its stock nine times, most recently in 2003. A single share would cost $123,800 today without stock splits. That price is out of reach for many, if not most, investors when it comes to buying a single share. And as you can see below, the price is skyrocketing again.

Splits also show that a company is booming, as the share price must have risen significantly. Unlike Microsoft ServiceNow (NYSE: NOW) has never split; however, with a share price of $879, this could soon change.

This is why these companies are so successful.

Microsoft

The release of the generative AI chatbot ChatGPT put the AI ​​race at the centre of society's and investors' consciousness. When Microsoft invested several billion dollars in its developer OpenAI, the technology companies were racing to catch up. ChatGPT integrates with Microsoft Bing, which could allow Bing to gain market share from alphabetGoogle Search generated $95 billion in revenue in the first half of 2024. Even small advances will generate billions in revenue for Bing.

Another key AI product is Microsoft Copilot. Copilot integrates with multiple products, answers questions, summarizes or generates text, creates images, codes, and analyzes data. According to Microsoft, 60% of Fortune 500 companies use Copilots, a staggering number given the newness of the technology. These innovations led to revenue growth of 16% to $245 billion in fiscal 2024. Operating income increased 24% to $109 billion, an excellent margin of 45%.

Microsoft shares trade at 36 times earnings, which is above its three- and five-year average of 33. However, the price-to-earnings (P/E) ratio is declining to 33 on a forward basis. Given the high valuation, investors should not expect the price to skyrocket overnight. Still, Wall Street can justify the current price due to Microsoft's AI capabilities.

ServiceNow

ServiceNow and Microsoft have been collaborating on many technology initiatives for years. The latest initiative integrates ServiceNow's AI product, Now Assist, with Microsoft Copilot. Without boring you with too many technical details, the Now Assist product increases productivity in areas like HR, IT support, customer service, and others. For example, Now Assist saves customer service agents time by summarizing a customer's last interaction so the agent doesn't have to go through the transcript, it allows agents to quickly search through massive databases to find answers faster, etc. The increased productivity is invaluable to businesses in a highly competitive world.

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

ServiceNow is in a higher growth phase than Microsoft ($2.6 billion in revenue with 22% growth last quarter), so its valuation is better expressed by revenue rather than earnings. Its current price-to-sales ratio is 18, which is the 5-year average. Looking ahead, the company expects subscription revenue of $10.5 billion in 2024 and $15 billion in 2026. This means that if the valuation remains the same, the stock price could potentially increase by almost 50% by 2026.

Microsoft and ServiceNow are making big moves in artificial intelligence, and with their stock prices rising, splits may be imminent.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Bradley Guichard does not own any of the stocks mentioned. The Motley Fool owns and recommends Alphabet, Microsoft, and ServiceNow. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

Stock Split Watch: 2 Artificial Intelligence (AI) Companies That Look Ready to Split was originally published by The Motley Fool