The Evolution of AI: Investment Opportunities and Insights from Dan Loeb
In a thought-provoking letter to clients last year, hedge fund billionaire Dan Loeb drew a compelling parallel between artificial intelligence (AI) and the industrial revolution. Both phenomena signify major shifts in productivity, with AI poised to trigger similar economic transformations across various industries.
Loeb articulated his perspective, stating, “We have watched AI evolve and believe the technology has matured to the point that it is driving a transformational technology platform shift similar to those seen roughly once per decade.” He references significant technological milestones including the personal computer in the 1980s, the internet in the 1990s, mobile technology in the 2000s, and cloud computing in the 2010s.
AI as an Investment Opportunity
This provides investors with a considerable opportunity. A prudent investment strategy is to establish a diverse portfolio of AI stocks. While many will instinctively focus on Nvidia (NASDAQ: NVDA), renowned for its powerful chips driving advanced AI technologies, ServiceNow (NYSE: NOW) presents an even more compelling proposition at its current valuation.
Nvidia’s Market Dominance
Nvidia’s graphics processing units (GPUs) are considered the gold standard for accelerating complex data workloads associated with AI. The firm consistently sets benchmarks at MLPerf, which evaluates the performance of AI hardware and software. According to The Wall Street Journal, Nvidia commands an impressive market share, reportedly over 80% in advanced AI systems.
Nvidia has exhibited staggering financial growth in its recent fourth quarter, with revenue skyrocketing by 265% to $22.1 billion, largely fueled by the surging demand for AI solutions.
Growth Projections and Valuation Concerns
Looking ahead, Grand View Research forecasts that spending on AI will increase at a staggering annual rate of 37% through 2030. Despite Nvidia’s strong foothold, analysts project sales growth of 27% annually over the next five years, leading to some skepticism regarding its current valuation at 36.6 times sales.
It’s important to clarify that this is not a suggestion for investors to offload their Nvidia stock. The company boasts a strong track record of innovation and impressive growth prospects. However, potential investors might wish to explore alternative AI stocks, such as ServiceNow, considering the current price levels.
ServiceNow: A Rising Star in AI
ServiceNow specializes in assisting organizations in the digitization and automation of workflows across various departments. The platform effectively handles four primary use cases:
- Technology workflows, including IT service and IT operations management
- Customer workflows, covering field service and customer service management
- Employee workflows, focusing on human resources
- Creator workflows, related to software development and process automation
While ServiceNow is widely recognized as a leader in IT service management, it has also garnered accolades in IT operations management and AI for IT operations from notable consultancy groups like Gartner. Additionally, Forrester Research has acknowledged ServiceNow’s leadership in several pertinent domains, reinforcing its appeal to investors and potential clients alike.
Financial Performance and Market Position
In the fourth quarter, ServiceNow reported a robust 26% increase in total revenue to $2.4 billion, marking the fourth consecutive quarter of accelerated growth. Encouragingly, the remaining performance obligation (RPO), a key metric for assessing sales momentum, rose 29% to $18 billion.
Furthermore, ServiceNow’s non-GAAP operating margin saw a notable expansion of roughly 150 basis points, with adjusted net income up 36% at $3.11 per diluted share. The retention of a renewal rate of 99%, which reflects high customer satisfaction, also underscores the company’s solid market position.
Future Growth Drivers
Digital transformation is expected to serve as a significant growth catalyst for ServiceNow. According to International Data Corp., digital transformation spending is projected to grow by 16% annually through 2027 as businesses increasingly digitize processes to enhance operational efficiency.
In addition, ServiceNow’s early move into generative AI, showcased through the launch of Now Assist in September, positions the company favorably. This suite of tools automates various tasks, enhancing productivity across IT service, customer service, human resources, and development teams. Bloomberg Intelligence anticipates that revenue from generative AI software will grow at 58% annually through 2032.
CEO Insights on the AI Landscape
ServiceNow’s CEO, Bill McDermott, emphasized the company’s strategic positioning during the latest earnings call. He stated:
“What we have here is a strong, durable market being supercharged by a once-in-a-generation secular trend. ServiceNow has been investing, innovating, and preparing for this wave for years, which is why we’re catching it so early. Artificial intelligence is injecting new fuel into our already high-performing growth engine.”
Investment Outlook
With all these considerations in mind, Wall Street projects ServiceNow’s sales to grow at a rate of 20% annually over the next five years. Given its current valuation at 17.4 times sales, acquiring a small stake in this growth stock now may prove to be a worthwhile investment for those with a long-term horizon.
Final Thoughts on Nvidia and Alternative Investments
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Trevor Jennewine owns shares in Nvidia. The Motley Fool has positions in and recommends Nvidia and ServiceNow. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.
A Once-in-a-Decade Investment Opportunity: 1 Artificial Intelligence (AI) Growth Stock to Buy Now — No, Not Nvidia was originally published by The Motley Fool.
