ServiceNow: Will the High-Flyer Finally Split in 2024?

Key Points

• ServiceNow's performance is exceeding expectations, bolstering the case for a potential stock split.
• Strategic investments in AI and global expansion position ServiceNow for continued growth despite intense competition.
• A premium valuation and recent insider selling activity warrant careful consideration from potential investors.

ServiceNow NYSE: NOW  has seen its stock price make a remarkable recovery since its pandemic low, surging by over 280%. This upward trajectory has continued in 2024, with the company's shares gaining an impressive 57% over the past year. With ServiceNow’s stock price hovering around $1,050 per share, whispers of a potential stock split are circulating among investors and ServiceNow’s analyst community. The prospect of a stock split has become a recurring theme in the ServiceNow narrative, with speculation intensifying each quarter. While the timing remains uncertain, the company's underlying strength continues to attract investors, making it a compelling investment opportunity regardless of a split.

Gauging Altitude: Performance Against Projections

ServiceNow's earnings report for the third quarter of fiscal year 2024 (Q3 FY2024) was impressive, but the market's focus has shifted to current performance. The company targets full-year 2024 subscription revenue between $10.655 billion and $10.66 billion, with Q4 guidance set between $2.875 billion and $2.88 billion. 

A critical question is whether ServiceNow is on track to meet these ambitious targets. While precise in-quarter figures have yet to be public, we can make some educated estimations. ServiceNow reported subscription revenue of $2.715 billion in Q3, which was a 23% gain year over year. This aligns with ServiceNow’s historical performance, which has shown that the stock has made similar gains between 22% and 25% over multiple previous quarters.  Assuming a similar or slightly improved sequential growth rate in Q4 (which would align with the company’s historical performance and the generally positive analyst outlook), it is reasonable to hypothesize that ServiceNow is on a trajectory to achieve, and potentially even surpass, its Q4 and full-year guidance. 

Decoding the Split: Why a Stock Split Matters

Stock splits often generate excitement among investors, but understanding the underlying reasons is crucial. Companies usually undertake stock splits to make their shares more accessible to a broader range of investors. A lower price per share can make the stock appear more affordable, potentially attracting smaller investors and boosting trading volume. 

Furthermore, a stock split can have a positive psychological impact, making the stock feel less expensive and potentially driving demand. Finally, inclusion in certain stock market indices and funds may be contingent on a specific price range. A stock split could make a company eligible for inclusion, potentially leading to increased institutional investment and further price appreciation. For ServiceNow, a stock split could broaden its investor base and fuel additional growth.

Fueling the Ascent: Growth Drivers and Competitive Landscape

ServiceNow is experiencing significant growth, driven in part by its strong emphasis on artificial intelligence (AI) powered workflow automation. The company's commitment to innovation in this area is evident in the Xanadu release, which features expanded AI capabilities and the introduction of the Workflow Data Fabric. 

Strategic partnerships with industry giants like NVIDIA NASDAQ: NVDA and Siemens OTCMKTS: SIEGY are expanding their ecosystem and creating tailored solutions for specific industries. Furthermore, their global expansion efforts, including significant investments in the UK, new data centers in Italy, and a strategic partnership in Singapore, demonstrate their commitment to capturing a larger share of the international market.

However, ServiceNow’s competition remains intense, with established players like Salesforce NYSE: CRM and Oracle NYSE: ORCL vying for market share. ServiceNow’s platform approach and extensive product offerings are key differentiators, but maintaining its competitive edge will require continuous innovation.

Valuation and Risk Assessment

ServiceNow's impressive growth trajectory is tempered by a valuation that demands careful consideration. With a trailing price-to-earnings ratio (P/E) of 163.72 and a forward P/E of 148.90, the stock is priced at a premium relative to its earnings, both current and projected. 

A price-to-sales ratio (P/S) of 20.73 further underscores this premium valuation. While these metrics don't inherently indicate overvaluation, they highlight the market's high expectations for ServiceNow's future performance. This creates a scenario where even minor setbacks or increased competition could lead to a stock price correction. 

The observed insider selling activity adds another layer of complexity. While insiders may sell for various reasons, this trend merits observation as it could signal concerns about the stock's near-term prospects. Therefore, while the growth story remains intact, investors must carefully weigh the risks associated with the current valuation against the potential for continued strong performance.

The Investment Decision: Weighing the Factors

The decision to invest in ServiceNow hinges on balancing its considerable growth potential against its elevated valuation. The possibility of a stock split adds another layer of complexity. While a split could further drive up the price in the short term, long-term value creation will ultimately depend on the company's continued execution and ability to navigate the competitive terrain. Investors should pay close attention to how ServiceNow performs against its guidance, the evolution of its AI strategy, and its ability to maintain its competitive advantages.

ServiceNow: Proceed With Caution

ServiceNow’s impressive growth and innovative product offerings make it an attractive investment for those seeking exposure to the digital transformation trend. However, the high valuation presents a significant risk. Investors should conduct thorough due diligence, considering the potential upside and the downside risks before making any investment decisions. While a stock split could create further momentum, long-term success hinges on ServiceNow's ability to continue delivering value to its customers and maintaining its competitive edge in a dynamic market.