Better Enterprise Software Stock: ServiceNow vs. Salesforce

Enterprise software is a hot ticket these days.

An equal-weighted portfolio of the 40 largest application software stocks rose 58% over the last year, leaving the S&P 500 (SNPINDEX: ^GSPC) far behind with a 33% return. These tech stocks trade at lofty valuation ratios as investors are betting on fantastic future growth. Artificial intelligence (AI) provided the original inspiration for this boom, disrupting the software industry at the drop of a ChatGPT-flavored hat.

Salesforce (NYSE: CRM) and ServiceNow (NYSE: NOW) are two of the leading names in enterprise software today. Both companies are leaning into the AI opportunity with promising results -- but which stock is the better buy today?

Let's take a look.

Data collected from YCharts and Finviz on Dec. 4, 2024.

Dueling by the numbers

As you can see in the table above, ServiceNow is growing faster than Salesforce these days. However, the two companies operate on different scales. Salesforce's revenues added up to $36.5 billion over the last four quarters, while ServiceNow's stopped at $10.5 billion. It's no surprise that the smaller business is growing at a faster clip.

But ServiceNow's market cap is catching up to the larger rival in a hurry. As a result, the smaller stock trades at much loftier valuation ratios. Whether you're looking at top-line sales or bottom-line profits, ServiceNow looks downright expensive in this matchup. It will take many years of superior growth to justify this massive stock price premium.

Digging deeper into Salesforce

There's a lot going on behind the scenes of these two companies.

In this week's third-quarter earnings call, Salesforce CEO Marc Benioff spoke about digital labor going mainstream and sparking "a revolutionary transformation" right about now. In the long run, this new market will be "hard to get our head completely around," as AI-powered assistants help humans with repetitive or data-heavy tasks. A brand-new service called Agentforce is a direct play on that opportunity and Salesforce already has hundreds of customers.

"Our pipeline is incredible for future transactions," Benioff said. "We've never seen anything like it. We don't know how to characterize it. This is really a moment where productivity is no longer tied to workforce growth, but through this intelligent technology that can be scaled without limits."

Over the coming quarters, AI-powered tools and digital agents will also make their presence known across Salesforce's other products and services. Lessons learned from customer interactions will help Salesforce run its own business, and vice versa.

Long story short, Salesforce may be on the cusp of a whole new growth spurt, depending on whether clients embrace or reject the Agentforce idea.

What's going on with ServiceNow?

In October's Q3 call, ServiceNow CEO Bill McDermott highlighted several tailwinds driving his business forward.

Chief among them is the economywide need to clean up and modernize a hodgepodge of information technology systems that evolved out of competing systems and in-house development over several decades. McDermott sees ServiceNow as the clear leader in this effort, driven by the company's long operating history and new generative AI tools. In many ways, ServiceNow's recently released Xanadu platform reminds me of Salesforce's Agentforce, but this version comes in dozens of industry-specific flavors.

And ServiceNow is already taking the next step into the AI-powered future.

"ServiceNow AI agents can uniquely advance beyond prompt-based activity to deep contextual comprehension," McDermott said. Then he explained what this jargon means in plain English: "This is like hiring an additional workforce to support people by doing the jobs they've never wanted to do in the first place."

This is how ServiceNow is tapping into the AI opportunity -- and attempting to run a few steps ahead of larger but perhaps slower-moving rivals like Salesforce.

Final verdict: Hold ServiceNow, buy Salesforce

I expect both Salesforce and ServiceNow to deliver excellent business results as the AI boom plays out. At the same time, ServiceNow seems to have a lot of its potential growth priced into the stock already. Salesforce could double or triple its share price without boosting its business -- and still look affordable next to its smaller rival.

So ServiceNow looks like a solid "hold" or a promising target for small, speculative bets on the digital workforce idea. But Salesforce is the clear winner as its promising AI-driven growth effort is married to a far more affordable stock price. To borrow a phrase from Warren Buffett, this is the "wonderful business at a fair price" you should prefer for your long-term, nest-egg investments.

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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Salesforce and ServiceNow. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.