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Last year, technology stocks put on yet another terrific performance. Of course, the main catalyst fueling tech stocks to new heights was ongoing euphoria surrounding all things artificial intelligence (AI).
One company that fared particularly well was enterprise software giant ServiceNow (NYSE: NOW). Shares of ServiceNow soared by 50% in 2024, more than double the gains witnessed in the S&P 500 index (SNPINDEX: ^GSPC) and handily outperforming the Nasdaq Composite (NASDAQINDEX: ^IXIC) , as well.
ServiceNow's stock price of roughly $1,000 per share makes it a prime candidate for a stock split. Below, I'll explain how stock splits work and detail why one could be in store for ServiceNow in 2025.
How does a stock split work?
A stock split sounds like a sophisticated concept, but in reality it's simply a financial engineering exercise. Let's look at how one works.
Let's say a company has a stock price of $100 and has 1 million shares outstanding. If the company announces a 10-for-1 stock split, the share price would subsequently by reduced by a factor of 10 while the outstanding share count rises by tenfold. In this example, that would imply the company's split-adjusted share price would be $10 and its outstanding share count would be 10 million.
Given these changes, the company's market cap remains the same, staying at $100 million.
Why ServiceNow looks like a good stock-split candidate
The chart below illustrates ServiceNow's stock-price action since its initial public offering (IPO) in 2012.
Over the last 12 years, ServiceNow stock has gained over 4,000% and is currently trading near all-time highs.
While dollar figures do not necessarily imply that a stock is overpriced, the company's share price of $1,000 is likely perceived as expensive by retail investors in particular. One of the chief reasons a company may engage in a stock split is to make its shares more accessible to a larger body of investors. In other words, even though a split does not change the underlying valuation of a business, the lower split-adjusted share price is often seen as "cheaper" -- thereby inspiring increased buying activity.
Notably, ServiceNow has never completed a stock split in its history as a public company. Considering its market-beating performance and its rising share price, I think the company looks like a great candidate for a stock split sooner rather than later.
Should you invest in ServiceNow stock?
One thing to note about ServiceNow is that it is a growth stock. Generally speaking, growth companies are laser focused on customer acquisition and cross-selling in order to accelerate revenue. For this reason, profitability trends can be quite volatile as any excess profits are typically reinvested right back into the business in the form of research and development (R&D) or sales and marketing.