The demand for Artificial Intelligence (AI) is experiencing a steady rise across various industries and sectors. As businesses increasingly recognize the potential of AI to drive innovation and efficiency, the demand for AI technologies and solutions continues to grow.
Thus, against this backdrop, it could be wise to invest in fundamentally robust software companies Microsoft Corporation (MSFT), ServiceNow, Inc. (NOW), and GoDaddy Inc. (GDDY) that seem to have the huge potential to capitalize on the growing AI demand.
Despite the strong macroeconomic headwinds, the software industry has remained resilient due to its consistent commitment to innovation, allowing it to navigate challenges and emerge stronger. In 2023, global spending in the software segment is projected to experience growth of 12.3% from 2022.
Moreover, the global market for AI software is anticipated to experience remarkable growth due to increasing demand for software-based solutions and services, coupled with the rapid adoption of AI tools and solutions. Forecasts suggest that by 2032, the market is projected to reach an astonishing $1.09 trillion, exhibiting a CAGR of 23%.
This strong growth trajectory reflects the widespread recognition of AI's transformative potential across industries and highlights the significant opportunities it presents for businesses and organizations worldwide.
With that being said, let us evaluate the fundamentals of MSFT, NOW, and GDDY in detail to see why they could be solid additions to your watchlist.
Microsoft Corporation (MSFT)
One of the most popular and sought-after software companies, MSFT barely requires any introduction. It develops, licenses, and supports software, services, devices, and solutions worldwide. It offers services such as Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, Skype for Business, Skype, Outlook.com, OneDrive, LinkedIn, etc.
On May 15, MSFT revealed a range of fresh AI solutions and enhancements to Microsoft Cloud for Non-profit. These updates aim to revolutionize the non-profit sector and redefine how fundraisers interact with donors, handle campaigns, and streamline operations.
In the same month, MSFT announced the expansion of access to the Microsoft 365 Copilot preview, along with the introduction of new features. Earlier this year, the company introduced Microsoft 365 Copilot, a powerful generative AI technology integrated into popular apps that millions of people use in their everyday lives, like Word, Excel, PowerPoint, Outlook, and Teams.
In addition, Satya Nadella, the Chairman and CEO of MSFT, believes that this new wave of AI would eliminate tedious tasks in work and unlock human creativity. He sees AI-powered tools as a means to address digital debt, cultivate AI skills, and empower employees.
MSFT’s total revenue increased 7.1% year-over-year to $52.86 billion in the third quarter (ended March 31, 2023), while its operating income rose 9.8% from the year-ago value to $22.35 billion.
The company’s net income and EPS grew 9.4% and 10.4% from the prior-year quarter to $18.29 billion and $2.45, respectively. Also, its comprehensive income increased 38.3% from the year-ago value to $19.11 billion.
Street expects MSFT’s revenue and EPS for the fourth quarter (ending June 30, 2023) to increase 6.9% and 14.7% year-over-year to be $55.42 billion and $2.56, respectively. Moreover, it surpassed the EPS estimates in three of its trailing four quarters, which is impressive.
MSFT’s shares have gained 34.5% over the past six months and 38.8% year-to-date to close the last trading session at $332.89.
MSFT’s POWR Ratings reflect this robust outlook. The stock has an overall B rating, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Stability, Sentiment, and Quality. In the 50-stock Software - Business industry, it is ranked #11. To see additional POWR Ratings of MSFT for Growth, Value, and Momentum, click here.
ServiceNow, Inc. (NOW)
NOW is engaged in providing enterprise cloud computing solutions that define, structure, consolidate, manage, and automate services for enterprises worldwide. It operates the Now platform for workflow automation, artificial intelligence, machine learning, process mining, performance analytics, electronic service catalogs and portals, etc.
On May 17, NOW and NVIDIA Corporation (NVDA) joined forces to create advanced generative AI capabilities that are tailored for enterprise use and can revolutionize business processes by enabling faster and more intelligent workflow automation.
By leveraging NVDA's software, services, and accelerated infrastructure, NOW is actively working on developing customized large language models. Through this collaboration, the company aims to enhance its already extensive AI functionality by incorporating generative AI across various areas within enterprises.
In the same month, NOW introduced new generative AI capabilities for its Now Platform to enhance workflow automation by delivering faster and more intelligent automation processes. The two new solutions, namely ServiceNow Generative AI Controller and Now Assist for Search, augment the company's existing AI functionality by incorporating generative AI capabilities directly into enterprise applications.
These innovative solutions enable companies to achieve cost reductions, improved productivity, enhanced user experiences, and faster time-to-value.
Furthermore, NOW and MSFT have expanded their strategic partnership, establishing a connection between the Now Platform and Azure OpenAI Service. This integration ensures that customers can leverage the potential of generative AI in a secure and trusted manner.
NOW’s total revenues increased 21.7% year-over-year to $2.09 billion in the first quarter (ended March 31, 2023), while its non-GAAP gross profit rose 22% from the year-ago value to $1.74 billion.
The company’s non-GAAP net income amounted to $483 million and $2.37 per share, representing increases of 37.2% and 37% from the prior-year quarter, respectively. Also, its non-GAAP income from operations income increased 26.3% from the year-ago value to $552 million.
Analysts expect NOW’s revenue and EPS for the second quarter (ending June 30, 2023) to increase 21.6% and 26.2% year-over-year to be $2.13 billion and $2.04, respectively. The company has an impressive earnings surprise history, surpassing the EPS estimates in each of the trailing four quarters.
The stock has gained 38.4% year-to-date to close the last trading session at $537.46.
NOW’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to Buy in our proprietary rating system.
It has an A grade for Growth and a B for Sentiment and Quality. Within the same industry, it is ranked #13. Click here to see the other ratings of NOW for Value, Momentum, and Stability.
GoDaddy Inc. (GDDY)
GDDY engages in the design and development of cloud-based products and operates through two segments: Applications and Commerce and Core Platform. It offers applications products, including Websites + Marketing, a mobile-optimized online tool that enables customers to build websites and e-commerce-enabled online stores.
On May 1, GDDY and MSFT formed a new partnership with a shared goal of facilitating the success of small businesses. As part of this collaboration, they introduced a solution that enables small businesses to accept payments seamlessly within live Microsoft Teams meetings with their customers.
Microsoft had chosen GDDY as one of the three commerce providers for this launch, recognizing GDDY Payments' strong growth and position as a leading payments provider in the United States.
On April 7, the company launched the Small Business Generative AI Prompt Library, which serves as a collection of over 35 prompts, with more being added regularly. Each prompt is a carefully crafted description of the desired task that businesses can utilize with tools such as OpenAI's ChatGPT and Google's Bard.
The objective is to provide small businesses with pre-designed prompts that yield helpful results, enabling them to make the most of these innovative AI technologies.
For the first quarter that ended March 31, 2023, GDDY’s total revenue increased 3.3% year-over-year to $1.04 billion. Its non-GAAP normalized EBITDA grew 10.5% from the year-ago value to $249.70 million.
The company’s net income amounted to $47.40 million and $0.30 per share, respectively, for the same period. Also, its non-GAAP unlevered free cash flow increased 5.9% from the year-ago value to $259.20 million.
During the same period, its total current assets and cash and cash equivalents amounted to $1.73 billion and $892.40 million, up 9.3% and 15.3% compared to $1.58 billion and $774 million, respectively, for the period that ended December 31, 2022.
The consensus EPS estimate of $0.57 for the second quarter (ending June 30, 2023) represents a marginal improvement year-over-year. The consensus revenue estimate of $1.05 billion for the ongoing quarter represents a 3.9% increase from the same period last year.
The stock has lost marginally over the past five days to close the last trading session at $72.35.
It’s no surprise that GDDY has an overall rating of B, which equates to Buy in our proprietary rating system. It has a B grade for Value and Quality. Out of 50 stocks in the same industry, it is ranked #6.
In addition to the POWR Ratings we’ve stated above, we also have GDDY’s ratings for Growth, Momentum, Stability, and Sentiment. Get all GDDY ratings here.
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MSFT shares were trading at $332.89 per share on Monday afternoon, up $6.97 (+2.14%). Year-to-date, MSFT has gained 39.46%, versus a 10.25% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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