Will ServiceNow continue its streak of double-digit EPS growth?

Enterprise cloud software stocks are some of the market’s top leaders, having rallied back in a big way in 2023 after a dismal 2022. That uptrend is continuing, as stocks like Datadog Inc. NASDAQ: DDOG, Nutanix Inc. NASDAQ: NTNX and ServiceNow Inc. NYSE: NOW.  

Not only is corporate data migration to the cloud still underway, but, as you might guess, AI is now driving even greater revenue for enterprise software makers.

Cloud storage stocks are fast evolving beyond their companies’ original value propositions. AI software applications are increasingly tailored toward the specific tasks various industries require. You won’t find an industry today that isn’t using AI in some type way, and those functional uses are growing, all of which means more “cha-ching” for software companies. 

ServiceNow reports fourth-quarter results on January 24, with analysts expecting net income of $2.78 a share on revenue of $2.40 billion.

The company specializes in workflow applications, which is an easy fit for AI to automate time-consuming tasks.

AI is tailwind for growth

After the third-quarter earnings report in October, CEO Bill McDermott told Barron’s that AI is a “tailwind for growth.” He said he expects infotech spending to double, which would be a good omen for not only ServiceNow but other stocks in the industry. 

But there are some mixed signals: Tech researcher Gartner, in a January 17 report, forecasts worldwide IT spending growth of 6.8% this year. That sounds pretty impressive until you realize that’s down from Gartner’s earlier forecast of 8% growth. 

Gartner analyst John-David Lovelock was direct in his assessment of corporate tech managers’ view of AI spending. 

Buyers take a step back to plan for AI

“While GenAI will change everything, it won’t impact IT spending significantly, similar to IoT, blockchain and other big trends we have experienced,” he wrote, referring to other breakthrough technologies that didn’t result in the revenue bonanza many analysts expected.

Lovelock sees 2024 as a year when corporations and other enterprise buyers, such as government agencies, take a step back and figure out how AI fits into their longer-term goals.

“2024 will be the year when organizations actually invest in planning for how to use GenAI, however, IT spending will be driven by more traditional forces, such as profitability, labor, and dragged down by a continued wave of change fatigue,” he wrote.

IT service spending set for strong growth

But with IT service spending expected to be the biggest growth area, enterprise software makers are set to benefit.

ServiceNow grew revenue between 20% and 29% in the past eight quarters. That’s an outstanding record. If the company meets analysts’ fourth-quarter forecasts, that would continue the pattern, with 24% revenue growth. 

If you look at the ServiceNow earnings history, you’ll see the company has a long track record of beating net income views, and its revenue was ahead of expectations in the past four quarters.

The ServiceNow chart shows the stock is up 6.03% in January, and up 74.85% in the past year. The stock is currently extended beyond its most recent buy point, so watch for a pullback to a short-term or medium-term moving average.

With a market capitalization of $153.57 billion, ServiceNow is an S&P 500 component, meaning it’s closely watched by analysts. 

Datadog fetching big gains

Fellow cloud software maker Datadog is also a large cap, with a market cap of $42.81 billion, but with tech valuations racing up so fast in recent years, it’s been tough to add new companies to the Technology Select Sector SPDR Fund NYSEARCA: XLK. 

But the company has been an industry leader, with a one-year gain of 93.25%. 

Datadog specializes in monitoring, allowing enterprise users to observe data across various platforms and applications. This gives customers the opportunity to troubleshoot quickly. 

The company says its Bits AI service allows customers to “investigate and respond to incidents more efficiently.” 

The Datadog chart shows the stock climbing out of a three-weeks-tight formation and rallying to its best levels since April 2022.

Watch for under-the-radar Nutanix 

Mid-cap Nutanix is one of those mostly unknown stocks that’s been outperforming bigger industry peers. Institutional investors favor large caps for stability, established track records, liquidity and lower volatility, but for savvy individual investors, there could be opportunities among the ranks of mid-caps.

Since the company’s inception in 2009, Nutanix has focused on unifying and integrating various aspects of customers’ tech stacks. With growing migration to the cloud, that aim has only been enhanced. 

The Nutanix chart shows the stock’s rocket ride since gapping out of a consolidation on September 1. With a one-month gain of 16.79%, the stock is currently well extended beyond a reasonable buy point, but this is another instance where watching for a pullback could offer a buy opportunity. 

Analysts expect earnings to grow by 54% this year and by another 39% in 2025, an indication there’s plenty of growth ahead to send this stock even higher. 

One growth driver: The company recently launched GPT-in-a-Box, a turnkey software to seamlessly integrate generative AI and machine learning applications into customers’ data management platforms.