Artificial intelligence (AI) is currently fascinating the investment community. In addition to the ‘Magnificent Seven’ stocks, investors are looking for other opportunities that could deliver similarly lucrative returns. But with so many tech executives touting the term “AI” in their earnings calls or during media interviews, it can be challenging to discern which companies are actually emerging as industry leaders.
Service now (NYSE: NOW) is a lesser known name among AI companies. The company specializes in automation solutions for information technology (IT) services and is quietly building an industry-leading AI infrastructure. An analysis of the stock relative to its peers suggests this would be a great time to pick up shares.
Leading the digital transformation revolution
ServiceNow is led by Bill McDermott, previously CEO of an enterprise software vendor JUICE. Since taking the reins at ServiceNow in 2019, McDermott has consistently used a specific term to describe the company’s disruptive agenda: digital transformation. But what exactly does that mean?
More than ever, companies rely on data – lots of data – to make informed, efficient decisions. Additionally, larger enterprises often use combinations of different software tools and platforms to house their data. Often these systems do not communicate easily with each other, putting decision makers in a difficult position.
ServiceNow helps companies digitize their operations and connect their data.
ServiceNow organizes a masterclass in sales
The chart below illustrates how ServiceNow has consistently grown the number of customers paying at least $1 million in annual contract value. These same customers are also spending more on ServiceNow each year, indicating that customers like the product offering.
One of the ways ServiceNow has been able to generate this growth is through newly developed AI-powered solutions. For example, during the fourth quarter, ServiceNow’s generative AI products were the largest contributor to net new annual contract value of any new product. The company has the global accounting firm EY and a leader in the field of payments Visa as notable customers of its AI tools.
Is ServiceNow stock a buy now?
AI has many different applications. When it comes to ServiceNow, IT spending trends are critical to analyze. On the company’s fourth-quarter earnings call in late January, McDermott said:
Gartner estimates that technology spending will reach $5 trillion by 2024 and grow to $6.5 trillion by 2027. That means spending will grow another $1 trillion in just two years, an acceleration from the more than a decade it took to reach $5 trillion. For the first time in a decade, IT services will outpace communications services in 2024. Gartner estimates that by 2027, almost all of the growth in global IT spending will come from software and IT services.
What McDermott emphasizes is that while technology spending in general is expected to grow, sooner or later software and IT services in particular are expected to benefit. Looked at another way, as ServiceNow continues to grow its enterprise customers at healthy rates, its best days may be ahead.
With a price-to-sales ratio of 18, ServiceNow stock trades in the middle of the pack among leading business software developers specializing in workplace automation services.
ServiceNow could very well be an undervalued growth stock, overshadowed by its larger competitors. Make no mistake: McDermott and his team are laying the groundwork today at the intersection of generative AI and IT software so that ServiceNow can benefit from rising IT spending in the years to come.
To me, ServiceNow represents a unique opportunity in the AI landscape. While the company may not attract the same amount of attention as other leading software providers, the trends in its customer base, combined with the overall evolution of its total addressable market, create an attractive investment opportunity.
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Adam Spatacco holds positions at Palantir Technologies. The Motley Fool holds positions in and recommends Atlassian, Datadog, MongoDB, Palantir Technologies, ServiceNow, Snowflake, Visa, and Workday. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.
1 Unstoppable Artificial Intelligence (AI) Stock to Buy in 2024 with Hand Over Fist was originally published by The Motley Fool