ServiceNow (NOW -0.37%) and AppLovin (APP 9.39%) are both high-growth technology companies that leverage artificial intelligence (AI) to simplify tasks for businesses. ServiceNow uses a cloud-based digital workflow platform to eliminate unstructured work patterns, enabling businesses to scale more efficiently, reduce costs, and support hybrid and remote workers. AppLovin publishes its own mobile games, but also develops AI-powered app monetization tools for other companies.
Over the past 12 months, ServiceNow stock has risen about 70% as the company surprised investors with the growth of its Now Assist-generated AI platform. But AppLovin’s stock price rose more than 280% as its new AI-powered advertising engine fueled its core software business. Let’s take a look at why AppLovin outperformed ServiceNow and whether it’s still better to buy ServiceNow.
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ServiceNow is still firing on all cylinders
Many cloud software companies have struggled in recent years as macro headwinds intensify. However, ServiceNow experienced a more modest slowdown as the economic downturn still forces many companies to streamline their digital workflows.
ServiceNow’s adjusted revenue in 2023 grew 23.5% compared to 28% growth in 2022. This was due to a 1 percentage point decrease in adjusted subscription gross margin to 85%. Adjusted earnings per share (EPS) increased 42% as the company curbed spending.
In 2024, we expect subscription revenue (which makes up the majority of sales) to increase by 22% as subscription gross margin declines to 84.5%. Analysts expect reported revenue and adjusted EPS to increase 22% and 28%, respectively.
ServiceNow expects near-term growth to be driven by new government contracts and increased use of Now Assist’s generative AI tools. In its most recent conference call in July, CEO Bill McDermott said the company’s “increasing relevance as an AI platform for business transformation” and that its growth is He said the economy remains on an “unprecedented trajectory.”
ServiceNow stock isn’t cheap at 55x forward earnings, but it still has plenty of room for growth. The company expects to generate at least $15 billion in subscription revenue in 2026, representing a compound annual growth rate (CAGR) of 20% from 2023. If it can maintain this momentum, it could generate even bigger multibagger profits in the future.
AppLovin overcomes macro headwinds
AppLovin’s revenue surged 92% in 2021. This growth was driven by several acquisitions, the expansion of our AI-powered AXON and AppDiscovery ad recommendation platforms, and the resilience of our first-party mobile games.
However, in 2022, AppLovin’s revenue growth leveled off and it posted a net loss. Inflation, rising interest rates and other macro headwinds to the digital ad market offset inorganic gains from the $1 billion acquisition of MoPub from Twitter.
In 2023, we overcame these challenges and saw a 17% increase in revenue as the advertising market flourished again. The company also returned to profitability on a generally accepted accounting principles (GAAP) basis, with its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin expanding by 7 percentage points to 46%.
For 2024, analysts expect AppLovin’s earnings per share to increase 251% and revenue to increase 35%. Most of that growth should be driven by the expansion of the AXON platform with more AI capabilities, lower interest rates, and a much warmer market for digital advertisers. In the latest conference call, CEO Adam Forogi said that by locking in more advertisers into the company’s ecosystem, the software business will grow by “20% to 30% annually” “over the long term.” He reiterated his goal of growing the company by 20%.
AppLovin’s stock still looks shockingly cheap at a forward P/E of 23 times, and the company has repurchased 11% of its stock over the past three years. During the same period, ServiceNow’s outstanding shares increased by 3%.
Better Buy: AppLovin
All of these AI-driven stocks have the potential to rise further in the coming years. However, AppLovin’s high growth rate, niche focus on the AI-powered ad engine market, and low valuation make it a better buy for now.
Leo Sun has no position in any stocks mentioned. The Motley Fool has a position in and recommends ServiceNow. The Motley Fool has a disclosure policy.
