Stock splits often occur after a big run-up. That is the backdrop for Netflix (NFLX 3.59%) and ServiceNow (NOW 0.19%), two high-growth businesses benefiting from growing streams of recurring revenue. Over the last 10 years, for instance, Netflix and ServiceNow's stocks are both up nearly 900%.
Netflix's recent stock split and ServiceNow's upcoming one coincide with their solid underlying business progress. But are the stocks still attractive after such magnificent runs over the last decade?
For the right investor, I think so.
Image source: Getty Images.
Netflix after the split
On Monday, Netflix completed a 10-for-1 stock split. The split, of course, does nothing to change the underlying business or even change the attractiveness of Netflix shares, but it lowers the share price and can broaden the investor base by making the price more accessible. Before the split, shares were trading well beyond $1,000. As of this writing, they're priced at about $114.
NASDAQ: NFLX
Key Data Points
The split comes at a time of strong growth at the streaming service company.
Netflix's revenue rose 17% year-over-year to $11.5 billion. The company benefited from growth in members, price increases, and strength in advertising.
As of this writing, Netflix trades at about 48 times earnings and around 11 times sales -- a demanding valuation for a media company. But if management can sustain double-digit revenue growth while continuing to expand its operating margin, that valuation can still work.
ServiceNow before the split
ServiceNow's third quarter benefited from subscription revenue reaching $3.3 billion in the period, up about 22% year over year. This helped total revenue grow by the same amount 22% to $3.4 billion.
NYSE: NOW
Key Data Points
The company's current remaining performance obligations climbed 21% year-over-year to about $11.4 billion, signaling a healthy backlog of contracted revenue.
Capturing ServiceNow's lucrative business model, free cash flow rose 18% year-over-year to $592 million, giving the company room to keep investing in AI (artificial intelligence) capabilities while still expanding margins over time.
"This outstanding Q3 performance is the clearest demonstration yet that ServiceNow is the AI platform for business transformation," said CEO Bill McDermott in the company's third-quarter earnings release.
Alongside those results, ServiceNow's board approved a five-for-one stock split, subject to shareholder approval at a special meeting on December 5.
ServiceNow's forward price-to-earnings ratio of 41 isn't cheap. But it's not bad, given how fast the company is growing and considering its positioning as an AI beneficiary. To this end, ServiceNow expects its AI-related products to exceed an annual contract value (ACV) of half a billion dollars this year and surpass $1 billion next year.
Of course, there are risks to investing in both companies -- starting with their high valuations. Shares certainly aren't cheap, so both companies will need to continue delivering strong double-digit top- and bottom-line growth for the foreseeable future. Additionally, Netflix still competes fiercely for viewing time and funds an increasingly expensive content slate. And ServiceNow remains heavily dependent on large enterprise and government budgets, which can contract during uncertain times or periods of economic weakness.
Overall, though, these are two extraordinary businesses -- and owning a slice of them over the next 10 years will likely prove to be rewarding. Sure, investors without a stomach for volatility or who don't have a high risk tolerance probably should pass on these ideas. High valuations like this are a recipe for volatility. But given their underlying business momentum, a small position for the right investors willing to hold for the long haul may make sense.
