Stock Split Watch: Will ServiceNow Stock Be Next?

One of the better performing stocks over the last few years is Service now (NOW 1.88%)The company launched its initial public offering (IPO) at $18 per share in 2012, and the stock has steadily climbed to $800 per share at the time of this writing.

Given that par price, investors are increasingly considering ServiceNow as a potential stock split candidate. But how likely is it that the company will make such a move? Let’s take a closer look.

ServiceNow Inventory Status

ServiceNow is an enterprise software company that offers end-to-end workflow automation software for online businesses. It also applies collaboration and development tools, using artificial intelligence, machine learning, robotic process automation, and other software to help businesses run more efficiently.

Companies like Sale, Atlassian, Broadcomand many others competing in the business. While Atlassian has never split its stock, Salesforce initiated a split in 2013. In addition, 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 has it indicated it would. If it were to initiate a 10-for-1 split similar to Broadcom, each share at about $800 per share would become 10 shares at $80 per share. This move leaves each investor with the same investment in a direct sense.

However, Broadcom, which went public three years before ServiceNow, waited until its pre-split stock price was well above $1,000 per share before making the move.

In addition, not everyone agrees that stock splits are necessary. Warren Buffett has never split stocks Berkshire HathawayA shares despite the stock price exceeding $600,000. In addition, it authorized the issuance of B shares only to give smaller investors an affordable entry point into the company. Therefore, ServiceNow shareholders should not view this as a move the company has to make.

Why a split might happen

Nevertheless, ServiceNow’s growth is poised to continue, which will likely increase pressure to split the stock.

In the first half of 2024, revenue of $5.2 billion was up 23% from the same period last year. Furthermore, revenue is up 24% in 2023, so the increase is not a one-time phenomenon. And while the tax break provided a one-time boost to net income in 2023 (and a subsequent decline in 2024), earnings should generally grow over the longer term.

Moreover, as rising revenues and profits drive up the stock over time, liquidity, or buying and selling activity, is likely to decline. Hence, the company may decide to split its shares to maintain liquidity levels and make it easier for investors to own entire shares of the company. Such interest may be slightly bullish for the stock.

In addition, if an investor writes a covered call on ServiceNow now, they would need to own 100 shares, which would now cost $80,000. However, if ServiceNow were to initiate a 10-for-1 split, that cost would drop to $8,000, which should increase covered call activity. Such situations could also prompt ServiceNow’s board to approve a split at some point.

ServiceNow and Stock Split

ServiceNow hasn’t publicly announced plans to split the stock, meaning investors have no reason to assume it will be the next big tech company to do so. Still, investors also have no reason to rule out the possibility.

The stock has surged to over $800 per share due to the company’s long-term growth history in the enterprise software industry. With ServiceNow showing no signs of reversing its growth, it’s reasonable to assume the price will continue to rise, increasing pressure to split the stock.

Admittedly, not all company executives believe in stock splits. Nevertheless, ServiceNow has never publicly ruled out the possibility of one. Moreover, lower prices attract smaller investors and increase overall activity, keeping the stock liquid. Factors like these make it more likely that even if ServiceNow isn’t the next stock split, it’s more likely that it will eventually happen.

Will Healy holds positions in Berkshire Hathaway. The Motley Fool holds positions in and recommends Atlassian, Berkshire Hathaway, Salesforce, and ServiceNow. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.