Several technology companies have recently undergone stock splits. Some of the more notable stock splits in the tech realm in recent memory include "Magnificent Seven" members Tesla, Nvidia, Amazon, Alphabet, and Apple.
While there are a number of upcoming stock splits to be aware of, there is one artificial intelligence (AI) company that I think could be next in line: ServiceNow (NOW +0.23%).
Let's dig into why ServiceNow makes a compelling stock-split candidate and explore the investment merits of this software-as-a-service (SaaS) leader.
NYSE: NOW
Key Data Points
How do stock splits work?
Before diving into ServiceNow specifically, investors should understand the basics of stock splits.
Stock splits are essentially a form of financial engineering. The number of outstanding shares increases by the ratio in the split. For example, in a 5-for-1 split, there will be five times as many shares following the split.
As a result, the share price of the stock in question decreases by that same multiple. This dynamic means that the market cap of the stock-split stock does not inherently change.
Image source: Getty Images.
Why would ServiceNow split its stock?
One of the most common reasons that a company decides to split its stock is because shares have soared significantly over a relatively short time frame. As a result, most retail investors perceive shares as expensive and out of reach.
Again, although a stock split doesn't change the value of the company, investors tend to view shares as cheaper because the stock price is now lower. Subsequently, stock splits are typically followed by a new pool of investors pouring in.
Since its initial public offering (IPO) in 2012, ServiceNow's shares are up 2,970%. Moreover, since AI has become a focal point among technology stocks in the last 18 months or so, ServiceNow shares have risen 77%.
With a share price of $755, ServiceNow stock doesn't look cheap. Considering the company has never split its shares and secular themes are fueling the AI landscape, now could be a unique opportunity for ServiceNow to follow in the footsteps of its larger tech peers as further gains look to be in store.
Should you invest in ServiceNow stock?
It's very important for investors to understand that the share price alone is not what determines a stock as over or undervalued. In fact, the chart below illustrates that ServiceNow is largely trading at a discount on a price-to-sales (P/S) basis when benchmarked against other SaaS growth stocks.
NOW PS Ratio data by YCharts
After analyzing the data above, there is a legitimate case to be made that ServiceNow is undervalued despite its seemingly expensive share price.
Another way of looking at this dichotomy is that it is not the number of shares that you own that matters; it's the amount of money you're putting to work. It's almost certainly a better idea to own one share of a $1,000 stock than 1,000 shares of a $1 stock. Generally speaking, the share price reflects the sentiment of the business.
As far as ServiceNow is concerned, there's one other reason I see the company as a potential stock-split opportunity. As I recently expressed, ServiceNow is not as well known in the technology and AI arenas as its competition. A stock split would be a good way for the company to make headlines and potentially land on the radar of a broader group of investors.
Now, with that said, I'm not suggesting that ServiceNow should use a stock split as a PR stunt to juice its price. Investors should buy shares in ServiceNow purely based on concrete business results.
Over the last several quarters, ServiceNow has moved swiftly in the AI world and it's showing in the company's results. Revenue growth is accelerating thanks to impressive customer retention metrics as well as ServiceNow's ability to cross-sell additional products and services.
Moreover, the company has forged partnerships with Microsoft, Nvidia, and International Business Machines. I see these as important stepping stones for further lead generation and new sales opportunities for long-term growth.
At the end of the day, ServiceNow is a rock-solid investment opportunity regardless of a split. Now looks like a great time to scoop up some shares and prepare to hold for the long term as the growth story continues to unfold.
