MSFT vs. NOW: Which Cloud Software Provider Offers More Upside?

Microsoft MSFT and ServiceNow NOW represent two distinctive approaches to enterprise cloud transformation. Microsoft stands as a diversified technology giant with deep roots across productivity software, cloud infrastructure and gaming, while ServiceNow has carved out a specialized niche in workflow automation and enterprise service management.Microsoft reported revenues of $77.7 billion in its first quarter of fiscal 2026, up 18% year over year, with Microsoft Cloud generating substantial growth. The tech behemoth continues leveraging its partnerships with OpenAI and expanding its Copilot AI assistant across Microsoft 365, attracting 90% of Fortune 500 companies. Meanwhile, ServiceNow raised its 2025 subscription revenue guidance following third-quarter results of $3.3 billion in subscription revenues, representing 21.5% year-over-year growth. The workflow automation specialist has positioned itself as an AI platform for business transformation, launching thousands of AI agents and establishing a "control tower" for enterprise AI orchestration.The competitive landscape between these cloud software leaders has intensified as enterprises accelerate digital transformation initiatives. While Microsoft brings scale and breadth, ServiceNow offers depth and specialization in workflow automation. Let's delve deep and closely compare the fundamentals of the two stocks to determine which one is a better investment now.The Case for MSFTMicrosoft's Intelligent Cloud segment demonstrated resilience, with revenues reaching $30.89 billion, driven by Azure's strong performance in cloud computing and AI services. The company's strategic positioning across multiple revenue streams provides diversification that few technology companies can match. Azure's growth trajectory, bolstered by a 16-percentage-point contribution from AI services, underscores Microsoft's success in monetizing its substantial investments in artificial intelligence infrastructure.At its Ignite 2025 conference, Microsoft unveiled Work IQ features and Agent 365, a new control plane for deploying and governing AI agents across enterprise environments. These announcements demonstrate Microsoft's commitment to embedding AI deeply into its productivity suite, potentially creating stickier customer relationships and higher lifetime value. The company's partnership ecosystem, including collaborations with Oracle for multicloud solutions and expanded relationships with OpenAI and Anthropic, positions it well for long-term enterprise AI adoption.However, Microsoft faces headwinds that investors should consider carefully. The company reported losses from investments in OpenAI that resulted in a decrease in net income and diluted earnings per share of $3.1 billion and 41 cents per share, respectively, in fiscal 2026's first quarter. These substantial investment costs, combined with massive capital expenditure requirements for AI infrastructure, raise questions about near-term profitability conversion. The company's heavy capital spending program, while necessary for maintaining competitive positioning, may pressure margins in the coming quarters.The competitive landscape presents additional challenges. Microsoft's AI initiatives face intensifying competition from Google's Gemini platform and Amazon's cloud services, with each hyperscaler investing tens of billions in infrastructure. Recent market concerns about whether the AI trade has run ahead of fundamentals have contributed to stock price volatility, with shares pulling back from recent highs.Microsoft Corporation Price and Consensus Microsoft Corporation price-consensus-chart | Microsoft Corporation QuoteThe Case for NOWServiceNow delivered exceptional third-quarter performance, with subscription revenue growth of 20.5% in constant currency, exceeding guidance by a full percentage point, while current remaining performance obligations reached $11.35 billion, representing 21% year-over-year growth. This performance demonstrates the company's ability to consistently exceed expectations while maintaining strong visibility into future revenues. The workflow automation leader has successfully positioned itself as the essential platform for enterprises seeking to deploy and manage AI agents at scale.ServiceNow's AI strategy stands out for its comprehensive approach to enterprise adoption. At Knowledge 2025, the company introduced an AI Control Tower offering a unified dashboard for business leaders to monitor AI agents running across enterprise systems, track adoption metrics and ensure governance compliance. The company's AI Agent Fabric enables first and third-party agents to communicate and collaborate, creating a powerful orchestration layer that competitors struggle to match.The company's financial profile reflects impressive operational leverage. Operating margin reached 33.5%, three full points above guidance, while the company raised full-year operating margin targets to 31%. This margin expansion, achieved while investing heavily in AI capabilities and sales expansion, demonstrates management's ability to balance growth with profitability. ServiceNow's success in landing large deals remains robust, with 103 transactions over $1 million in net new annual contract value during the third quarter, including six exceeding $10 million.Strategic partnerships amplify ServiceNow's competitive advantages. The company expanded its strategic partnership with NTT DATA and designated them as a strategic AI delivery partner to accelerate AI-led transformation for enterprises globally. These partnerships, combined with collaborations with Nvidia on open-source AI models and integrations with major cloud providers, expand ServiceNow's addressable market while reducing implementation friction for customers. The company's federal business grew over 30% year over year, demonstrating strength in a traditionally challenging market segment that many software companies struggle to penetrate effectively.ServiceNow, Inc. Price and Consensus ServiceNow, Inc. price-consensus-chart | ServiceNow, Inc. QuoteValuation and Price Performance ComparisonBoth companies command premium valuations that reflect their leadership positions in enterprise software, though their valuation metrics tell different stories. Microsoft's price-to-earnings ratio stands at 28.27, which is slightly below its 5-year historical average but remains reasonable relative to the company's growth profile. The forward P/E ratio suggests continued earnings growth as AI monetization accelerates.ServiceNow trades at a forward P/E of 40.95, reflecting expectations for significant earnings acceleration. While this appears substantially higher than Microsoft's multiple, ServiceNow's valuation is more justified when considering its superior growth rates, expanding margins and specialized positioning in workflow automation.MSFT vs. NOW: P/E F12M RatioImage Source: Zacks Investment ResearchPrice performance divergence between the stocks is striking. Microsoft has gained 12% year to date in 2025. In contrast, ServiceNow stock has declined 23.3% year to date despite strong operational execution. This underperformance, driven by broader software sector pressure rather than company-specific issues, has created a more attractive entry point for investors focused on long-term growth potential.MSFT Outperforms NOW Year-to-dateImage Source: Zacks Investment ResearchConclusionServiceNow presents more compelling upside potential for investors seeking exposure to cloud software innovation and AI-driven enterprise transformation. The company's specialized workflow automation platform, superior revenue visibility through strong remaining performance obligations, accelerating margin expansion and strategic positioning as the AI control tower for enterprises provide multiple growth vectors that Microsoft's diversified model cannot replicate. Investors should actively track ServiceNow stock for attractive entry points, given the year-to-date decline, while those considering Microsoft may benefit from waiting for better entry opportunities, should valuations compress further or operational metrics show clearer AI monetization progress in the coming quarters. MSFT and NOW carry a Zacks Rank #3 (Hold) each. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.5 Stocks Set to DoubleEach was handpicked by a Zacks expert as the favorite stock to gain +100% or more in the months ahead. They includeStock #1: A Disruptive Force with Notable Growth and ResilienceStock #2: Bullish Signs Signaling to Buy the DipStock #3: One of the Most Compelling Investments in the MarketStock #4: Leader In a Red-Hot Industry Poised for GrowthStock #5: Modern Omni-Channel Platform Coiled to SpringMost of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor. While not all picks can be winners, previous recommendations have soared +171%, +209% and +232%.Download Atomic Opportunity: Nuclear Energy's Comeback free today.Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Microsoft Corporation (MSFT): Free Stock Analysis Report ServiceNow, Inc. (NOW): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).Zacks Investment ResearchWeiter zum vollständigen Artikel bei Zacks Weiter zum vollständigen Artikel bei Zacks