This AI Stock Just Announced a Stock Split. Is It Time to Buy?

ServiceNow (NYSE: NOW) is the latest AI (artificial intelligence) stock to announce a stock split. It comes on the heels of impressive business performance as AI helps boost results. The tech company is seeing visible business momentum in AI-assisted workflows.

With a stock split on the horizon, it's a good time to look at the stock. Do shares look like a good buy ahead of the split? After all, the workflow software specialist reported another solid quarter and raised its outlook.

Let's take a look.

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Firing on all cylinders

ServiceNow delivered a strong third quarter, topping its own guidance. Total revenue rose $22% year over year to $3.4 billion, driven by a 21.5% increase in subscription revenue (total subscription revenue for the quarter was $3.3 billion, accounting for most of ServiceNow's revenue).

Importantly, large-deal activity remained strong, with the company signing over one hundred net-new transactions above the $1 million annual contract value threshold during the period. This helped bolster the company's remaining performance obligations (RPOs), which are a good indication of demand trends. RPOs rose 24% year over year to $24.3 billion.

Management highlighted broad-based strength and called out AI-driven products such as Now Assist, Workflow Data Fabric, and the company's new RaptorDB.

"This outstanding Q3 performance is the clearest demonstration yet that ServiceNow is the AI platform for business transformation," ServiceNow and CEO Bill McDermott said in the earnings release.

The company did note near-term timing uncertainty in U.S. federal budgets amid a government shutdown. Even so, federal remained a bright spot in the third quarter and continues to be an area where the platform's AI-powered automation resonates.

This was the backdrop for the company's five-for-one stock split, which the company said will go to a special shareholder vote on Dec. 5.

Why succeeding with its AI products is key

AI is a major driver for ServiceNow's business, so much so that the company is predicting that its annual contract value (ACV) related to its AI-related products is likely going to go from exceeding $0.5 billion this year to surpassing $1 billion next year. In one example of some AI-based products that are seeing explosive growth, the company's AI Control Tower deal volume more than quadrupled sequentially in Q3, management explained in the company's third-quarter earnings call. Even more staggering, the company's AI Agent Assist consumption is 55 times greater than it was at the end of May; "that's the foundation of a beautiful hock stick that's coming to you," said McDermott during the call.

The company will need strong growth from AI products to persist in order to live up to the stock's high valuation. As of this writing, shares are trading at a forward price-to-earnings multiple of 45 -- certainly not cheap but probably fair for a high-margin software company with big growth opportunities due to AI.

Of course, investors should note that the upcoming stock split, in and of itself, won't make shares cheaper from a valuation standpoint. So, while a stock split is notable, it's just a formality, not a thesis-changer. Sure, it can increase accessibility for employees and retail investors. However, ServiceNow's stock split simply means that for every share there is today, there will be five after the split, totaling the value of what one share would have been priced at.

So, is ServiceNow stock a buy ahead of its stock split? While its strong business execution makes a great case for continuing to hold shares (even at this price), the stock arguably isn't cheap enough to justify buying.

For now, I'm putting this stock on my watchlist.

Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ServiceNow. The Motley Fool has a disclosure policy.