One of the better-performing stocks of the last few years is ServiceNow (NYSE: NOW). The company launched its initial public offering (IPO) at $18 per share in 2012, and the stock has climbed steadily to a price now topping $800 per share as of this writing.
Due to that nominal price, investors are increasingly considering ServiceNow as a possible stock-split candidate. But how likely is the company to make that move? Let's take a closer look.
The state of ServiceNow stock
ServiceNow is an enterprise software company. It offers software for end-to-end automation of workflows for companies operating online. It also employs tools for collaboration and development, utilizing artificial intelligence, machine learning, robotics process automation, and other types of software to help businesses run more efficiently.
Companies such as Salesforce, Atlassian, Broadcom, and numerous others compete in this business. Although Atlassian has never split its stock, Salesforce initiated a split in 2013. Also, Broadcom just split its stock for the first time in its history, splitting 10-for-1 in July.
ServiceNow has never split its stock nor indicated it will. If it initiated a 10-for-1 split similar to Broadcom's, each share at approximately $800 per share would become 10 shares at $80 per share. That move leaves each investor with the same investment in a direct sense.
However, Broadcom, which launched its IPO three years before ServiceNow, waited until its pre-split price was well above $1,000 per share before making such a move.
Also, not everyone agrees that stock splits are necessary. Warren Buffett has never split Berkshire Hathaway's A shares despite a share price exceeding $600,000. Also, he only allowed the issuance of B shares to give smaller investors an affordable entry point into the company. So, ServiceNow shareholders should not see this as a move the company has to make.
Why a split may eventually occur
Nonetheless, ServiceNow's growth is on track to continue, which will likely increase the pressure to split its shares.
For the first half of 2024, revenue of $5.2 billion rose 23% compared with the same period the previous year. Also, revenue grew by 24% in 2023, so the growth is not a one-time phenomenon. And even though a tax rebate gave a one-time boost to net income in 2023 (and a subsequent drop in 2024), profits should generally rise longer term.
Also, as rising revenue and earnings lift the stock over time, liquidity, meaning buy and sell activity, is likely to fall. Hence, the company may decide to split its stock to maintain liquidity levels and make it easier for investors to own whole shares of the company. Such interest may be mildly bullish for the stock.
Additionally, if an investor writes a covered call on ServiceNow right now, they are required to hold 100 shares, which would now cost $80,000. However, if ServiceNow initiates a 10-for-1 split, that cost falls to $8,000, which should increase covered call activity. Such situations may also prompt ServiceNow's board to approve a split at some point.
ServiceNow and a stock split
ServiceNow has not publicly announced plans to split its stock, meaning investors have no reason to assume it will be the next major tech company to do so. Still, investors have no reason to rule out such a move, either.
The stock has risen to a price exceeding $800 per share due to the company's long-term track record of growth in the enterprise software industry. Since ServiceNow shows no signs of reversing growth, one has to assume that the price will continue to climb, increasing pressure to split its shares.
Admittedly, not all company heads believe in stock splits. Nonetheless, ServiceNow has never publicly ruled out such an event. Moreover, lower prices attract smaller investors and increase overall activity, keeping a stock liquid. Such factors make it more likely that even if ServiceNow is not the market's next split, one is more likely than not to occur eventually.
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Will Healy has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Atlassian, Berkshire Hathaway, Salesforce, and ServiceNow. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
