Observing Potential Stock Splits: Could ServiceNow be Next?
ServiceNow, referred to as NOW with a drop of 0.34%, debuted in the public market in 2012. Since then, the stock has experienced an astounding surge, reaching a staggering 4,200% increase. That means if you had invested $1,000 on the first day, you'd now have a tidy sum of $43,140. And if you had bought a single share at the public offering's closing price of $24.60, your investment would have grown to a significant $1,061.
Despite the soaring stock price, ServiceNow has never executed a stock split. This four-digit figure can be a challenge for investors with limited budgets.
However, if ServiceNow decides to split its stock in the near future, what would it mean for its investors? Let's delve into it.
What's the purpose of a stock split?
A stock split might seem like creating wealth out of thin air. If you own one ServiceNow share and the company issues a 10-for-1 split, you'll own 10 shares after the split. Exciting, isn't it?
But hold on. ServiceNow remains the same company with a market cap of approximately $219 billion. The only change is that the ownership is divided into a larger number of equal shares. Therefore, a stock split doesn't impact the value of your $1,600 investment. The value remains the same; you just own ten times more shares, each trading at one-tenth the pre-split value.
This concept applies equally if your brokerage allows the trading of fractional shares. Instead of waiting for a stock split, you can buy one-tenth of a share right away.
There are some exceptional cases where a stock split can make a difference, but those are typically not relevant to individual investors. For instance, ServiceNow offers stock-based compensation to its employees, which accounted for 15% of the company's sales and marketing expenses in the recently reported third quarter. Splitting the stock would give the company and its employees more precise control over their stock-based compensation.
However, that's an internal matter.
Why should ServiceNow consider a split?
ServiceNow's shares have performed exceptionally well, with a 59% surge in the past 52 weeks and a 280% rise in the past five years. When stock prices reach such heights, companies often consider altering their split ratios. Recent examples include chip designer Nvidia performing a 10-for-1 split and fast-casual restaurant chain Chipotle Mexican Grill opting for a 50-for-1 exchange.
These splits were executed within a week of each other. Nvidia's stock price dropped from around $1,250 to $125, while Chipotle's share price declined from $3,250 to $65. However, it's crucial to remember that no money was made or lost due to these splits. They just made stock management easier with a limited budget for stock buying.
ServiceNow shares are currently close to Nvidia's pre-split price, and a split announcement might be imminent. But I wouldn't bet on it happening soon.
What ServiceNow investors should focus on
Stock charts can be entertaining, but financial statements are more important. Fortunately, ServiceNow runs a successful business. Its sales have tripled in the past five years while free cash flows have quadrupled.
ServiceNow's tools for managing operating processes are highly sought after. Helping clients manage their cloud computing setups has driven significant growth in recent years, and the company is now focusing on artificial intelligence (AI) systems.
The company's positive business outlook should drive the stock price even higher in 2025 and beyond. The shares may appear expensive in terms of valuation ratios, but the company's impressive growth justifies the lofty stock price.
So, while a stock split might be considered for cosmetic reasons, the shares remain attractive to growth investors, regardless of any potential stock split in the near future.
If ServiceNow decides to split its stock, it could make stock management easier for investors with limited budgets who are interested in buying fractions of a share. However, the actual value of an investor's portfolio would not change after the split, as the only difference would be the number of shares owned.
Given ServiceNow's exceptional stock performance and the high demand for its tools, investing in the company could be an attractive option for growth investors, regardless of a potential stock split in the future.
