Stock-Split Watch: Is Netflix Next?

Why are stock splits so popular?

Well, for starters, There is some evidence to suggest that Stocks perform better after a stock split. And while it is far from it an established factInvestors should know that.

That is to say Nothing of most obvious creating opportunity stock splits: the chance for investors to buy shares at a lower price.

With that in mind, let’s take a look at one stock that could be on the verge of a stock split announcement: Netflix (NFLX -1.05%).

Image source: Getty Images.

A quick refresher on stock splits

Before we get into why Netflix is ​​about to split its stock, let’s first understand what a stock split is.

Crucially, a stock split does not change one of the underlying fundamentals of a company: it simply changes the number of shares outstanding and their price.

To understand this, imagine a dollar bill. Everyone understands that a $1 bill is worth $1. Likewise, if you take that dollar bill to the bank and ask the teller to give you four quarters, you still have $1, just in the form of four. quarters, instead of one invoice.

Stock splits work the same way.

If a company’s stock is trading at $400 and It performs a 4-for-1 stock split, each shareholder receives four new shares (worth $100 each) in exchange for one old share.

The fundamentals of the business, including sales, profits and cash current, are not affected by the change.

Why Netflix May Be Ready to Split

Okay, so now that we’ve summarized what a stock split is, let’s look at why Netflix seems ready to announce one.

First outit’s worth pointing out that Netflix hasn’t done a stock split in years – almost a decadein reality. The company last split its shares in 2015 and conducted a 7-for-1 stock split in July 2015.

NFLX data by YCharts

Since then, Netflix has not split its stock, which helps explain why the company’s stock (at the time of writing) is trading for over $700 per share. That’s a lot to spend on one share, and Netflix’s stock has hit new all-time highs, but there are other reasons why the company might want to do a split.

For example, companies often provide stock-based compensation (SBC) to employees. In the case of Netflix, the company spent $339 million on SBC in 2023. However, if a company’s stock price rises too high, it can become challenging to fine-tune an employee’s SBC.

Moreover, there are other, more technical reasons why the company wants to split its sharesat. Highly priced stocks can be problematic for options traders, leading to illiquid trading on exchanges as the bid/ask spread on the stock widens.

In short, companies often like to keep their stock price between $100 and $300 to avoid these complications.

Will Netflix split its shares? And is it a sale now?

In short, yes, I believe Netflix will announce a stock split and it could come as early as October. The company reports its next round of quarterly results on October 17, which would be an obvious time for the company to report news of an upcoming stock split.

Either way, investors should take a closer look at Netflix now. The company is doing well as revenue growth has returned and operating margins have increased after a tough performance period in 2022. Clearly, the company has turned the corner and is outperforming many of its competitors in the streaming wars. In short, I think Netflix remains a great buy-and-hold stock for long-term investors.