Better High-Growth AI Stock: ServiceNow vs. AppLovin

ServiceNow (NOW -1.12%) And AppLovin (APP 0.28%) are both high-growth technology companies that use artificial intelligence (AI) to simplify tasks for businesses. ServiceNow cleans up unstructured work patterns with its cloud-based digital workflow platform, enabling companies to expand more efficiently, reduce costs and support their hybrid and remote workforce. AppLovin publishes its own mobile games, but also develops AI-powered app monetization tools for other companies.

Over the past 12 months, ServiceNow shares have gained about 70% as the company delighted investors with the growth of its generative AI platform Now Assist. However, AppLovin's stock rose more than 280% as its new AI-powered advertising engine roiled the company's core software business. Let's look at why AppLovin outperformed ServiceNow – and whether it's still the better buy.

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ServiceNow is still running at full speed

Many cloud software companies have faced increasing macroeconomic headwinds in recent years. However, ServiceNow suffered a slight decline as economic downturns continue to prompt many companies to optimize their digital workflows.

In 2023, ServiceNow's adjusted revenue increased 23.5% – compared to 28% growth in 2022 – as adjusted subscription gross margin fell one percentage point to 85%. Adjusted earnings per share (EPS) rose 42% as the company reduced spending.

For 2024, the company expects its subscription revenue (which makes up the majority of its revenue) to increase 22%, while subscription gross margin falls to 84.5%. Analysts expect reported revenue and adjusted earnings per share to rise 22% and 28%, respectively.

ServiceNow expects its near-term growth to be driven by new government contracts and increasing use of Now Assist's generative AI tools. In his last conference call in July, CEO Bill McDermott said that the company's “importance as an AI platform for business transformation is rapidly increasing” and that growth is still on an “unprecedented path.”

ServiceNow stock isn't exactly cheap at 55 times expected earnings, but it still has plenty of room for growth. The company 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 this momentum, it could see even bigger multibagger gains in the future.

AppLovin is overcoming its macroeconomic headwinds

AppLovin's revenue increased 92% in 2021. This growth was driven by multiple acquisitions, the expansion of its AI-powered ad recommendation platforms AXON and AppDiscovery, and the resilience of its first-party mobile games.

But in 2022, AppLovin's revenue growth stalled and the company posted a net loss. Inflation, rising interest rates and other macro headwinds for the digital advertising market offset the inorganic benefits from Twitter's $1 billion purchase of MoPub.

In 2023, revenue increased 17% as the company navigated these challenges and the advertising market heated up again. The company also returned to profitability under generally accepted accounting principles (GAAP), while adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) increased 7 percentage points to 46%.

For 2024, analysts expect AppLovin's revenue to rise 35% while earnings per share rise 251%. Most of this growth is likely to come from expanding its AXON platform with more AI features, falling interest rates, and a much warmer market for digital advertisers. During its most recent earnings call, CEO Adam Foroughi reiterated his goal of growing its software business by “20% to 30% annually” over the “long term” as the company brings more advertisers into its ecosystem.

AppLovin stock still looks surprisingly cheap at 23 times forward earnings, and the company has even repurchased 11% of its shares in the last three years. ServiceNow's outstanding share count increased 3% over the same period.

The better buy: AppLovin

Both AI-driven stocks could continue to rise in the next few years. However, AppLovin's stronger growth rates, niche focus on the AI-powered advertising engine market, and lower valuation should make it a better buy for the foreseeable future.