Last year, technology stocks put on yet another terrific performance. Of course, the main catalyst fueling tech stocks to new heights was ongoing euphoria surrounding all things artificial intelligence (AI).
One company that fared particularly well was enterprise software giant ServiceNow (NOW -2.34%). Shares of ServiceNow soared by 50% in 2024, more than double the gains witnessed in the S&P 500 (^GSPC -1.54%) and handily outperforming the Nasdaq Composite (^IXIC -1.63%) , as well.
With a stock price of roughly $1,000 per share, I think ServiceNow makes a prime candidate for a stock split. Below, I'll explain how stock splits work and detail why one could be in store for ServiceNow in 2025.
How does a stock split work?
Stock splits sound like a sophisticated concept, but in reality it's simply just a financial engineering exercise. Let's look at how one works.
Let's say a company's stock price is $100 and has 1 million shares outstanding. If the company announces a 10-for-1 stock split, the share price would subsequently by reduced by a factor of 10 while the outstanding share count rises by tenfold. In this example, that would imply the company's split-adjusted share price is $10 and its outstanding share count is 10 million.
Given these changes, the company's market cap remains the same -- staying at $100 million.
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Why ServiceNow looks like a good stock split candidate
The chart below illustrates ServiceNow's stock price action since its initial public offering (IPO) in 2012.
Over the last 12 years, ServiceNow stock has gained over 4,000% and is currently trading near all-time highs.
While dollar figures do not necessarily imply that a stock is overpriced, the company's share price of $1,000 is likely perceived as expensive by retail investors in particular. One of the chief reasons a company may engage in a stock split is to make its shares more accessible to a larger body of investors. In other words, even though a split does not change the underlying valuation of a business, the lower split-adjusted share price is often seen as "cheaper" -- thereby inspiring increased buying activity.
Notably, ServiceNow has never completed a stock split in its history as a public company. Considering its market-beating performance and its rising share price, I think the company looks like a great candidate for a stock split sooner than later.
Should you invest in ServiceNow stock?
One thing to note about ServiceNow is that it is a growth stock. Generally speaking, growth companies are laser focused on customer acquisition and cross-selling in order to accelerate revenue. For this reason, profitability trends can be quite volatile as any excess profits are typically re-invested right back into the business in the form of research and development (R&D) or sales and marketing.
These dynamics can make ServiceNow a little challenging to value, as profit-based methodologies such as price-to-earnings (P/E) aren't entirely appropriate.
NOW EV to Revenues data by YCharts
In the chart above, I've used the enterprise value-to-revenue (EV/Revenue) ratio to value ServiceNow. Given the company's ongoing valuation expansion (as indicated by the rising share price), it's not surprising to see ServiceNow trading at a premium to its five-year EV/Revenue average.
Nevertheless, given the rising importance AI is playing in the field of enterprise software, there are many reasons to believe that ServiceNow is well-positioned for significant upside. In other words, despite the appearance of a pricey stock, there is a legitimate argument to be made that ServiceNow's best days are very much ahead and the stock could actually be undervalued.
To me, ServiceNow is a compelling opportunity for AI investors regardless of split happening. Growth investors in particular may want to keep ServiceNow on their radar. Moreover, investors with a long-term horizon could also consider a position in ServiceNow as the company continues riding the tailwinds of a bullish AI narrative.
