ServiceNow(NYSE: NOW) and AppLovin(NASDAQ: APP) are both high-growth tech companies that leverage artificial intelligence (AI) to simplify tasks for companies. ServiceNow cleans up unstructured work patterns with its cloud-based digital workflow platform so companies can expand more efficiently, cut costs, and support their hybrid and remote workers. AppLovin publishes its own mobile games, but it also develops AI-powered app monetization tools for other companies.
Over the past 12 months, ServiceNow's stock rallied about 70% as it dazzled investors with the growth of its Now Assist generative AI platform. However, AppLovin's stock surged more than 280% as its new AI-powered ad engine lit a fire under its core software business. Let's see why AppLovin outperformed ServiceNow -- and if it's still the better buy.
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ServiceNow is still firing on all cylinders
Many cloud software companies struggled in recent years as the macro headwinds intensified. However, ServiceNow suffered a milder slowdown because economic downturns still drive a lot of companies to streamline their digital workflows.
In 2023, ServiceNow's adjusted revenue rose 23.5% -- compared to its 28% growth in 2022 -- as its adjusted subscription gross margin dipped a percentage point to 85%. Its adjusted earnings per share (EPS) grew 42% as it reined in its spending.
For 2024, it expects its subscription revenue (which accounts for most of its top line) to grow 22% as its subscription gross margin slips to 84.5%. Analysts expect its reported revenue and adjusted EPS to increase 22% and 28%, respectively.
ServiceNow expects its near-term growth to be driven by fresh government contracts and the growing usage of Now Assist's generative AI tools. In its latest conference call in July, CEO Bill McDermott said its "relevance as the AI platform for business transformation is soaring" and its growth was still on an "unprecedented trajectory."
ServiceNow's stock isn't cheap at 55 times forward earnings, but it still has plenty of room to grow. It expects to generate at least $15 billion in subscription revenue in 2026, which would represent a compound annual growth rate (CAGR) of 20% from 2023. If it maintains that momentum, it could generate even bigger multibagger gains in the future.
AppLovin is overcoming its macro headwinds
AppLovin's revenue surged 92% in 2021. That growth was driven by several acquisitions, the expansion of its AI-powered AXON and AppDiscovery ad recommendation platforms, and the resilience of its first-party mobile games.
But in 2022, AppLovin's revenue growth flatlined and it posted a net loss. Inflation, rising interest rates, and other macro headwinds for the digital advertising market offset the inorganic benefits from its $1 billion purchase of MoPub from Twitter.
In 2023, its revenue rose 17% as it lapped those challenges and the advertising market warmed up again. It also turned profitable again on a generally accepted accounting principles (GAAP) basis while its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin expanded 7 percentage points to 46%.
For 2024, analysts expect AppLovin's revenue to rise 35% as its earnings per share soars 251%. Most of that growth should be driven by the expansion of its AXON platform with more AI features, declining interest rates, and a much warmer market for digital advertisers. During its latest conference call, CEO Adam Foroughi reiterated its goal of growing its software business "20% to 30%" annually over "the long term" as it locked more advertisers into its ecosystem.
AppLovin's stock still looks surprisingly cheap at 23 times forward earnings, and it's even bought back 11% of its shares over the past three years. ServiceNow's number of outstanding shares increased by 3% during the same period.
The better buy: AppLovin
Both of these AI-driven stocks could climb higher over the next few years. However, AppLovin's stronger growth rates, niche focus on the AI-powered ad engine market, and its lower valuation should make it the better buy for the foreseeable future.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ServiceNow. The Motley Fool has a disclosure policy.
