Viewing in Stock: Is Netflix Next?

Why are stock splits so popular?

Well, for starters, there is some evidence to suggest stocks perform better after a stock split. And while it is far from an established factinvestors should know this.

namely nothing of the most obvious stock split opportunity creates: the chance for investors to buy stock at a lower price.

With that in mind, let’s examine a stock that could be on the verge of a stock split announcement: Netflix (NFLX -1.18%).

Image source: Getty Images.

A quick refresher on stock splits

Before we look at why Netflix might be about to split its stock, let’s look at what a stock split is.

Essentially, a stock split doesn’t change any of the 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. Similarly, if you take that dollar bill and ask the cashier to give you four quarters, you still have $1 — just four quarters, rather than a single invoice.

Splitting shares works the same way.

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

Company fundamentals, including revenue, profits and cash flow, are not affected by the change.

Why Netflix Could Be Ready to Break Up

OK, so now that we’ve recapped what a stock split is, let’s cover why Netflix looks poised to announce one.

First offit’s worth pointing out that Netflix he didn’t a stock divided into years — nearly a decadeactually. The company last split its stock in 2015, conducting 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 (as of this writing) the company’s stock is trading at over $700 per share. That’s a lot to pay for a single share, and Netflix stock has hit new all-time highs, but there are other reasons the company might want to do a split.

For example, companies often issue employees stock-based compensation (SBC). In the case of Netflix, the company issued $339 million in SBC in 2023. However, if a company’s stock price rises too much, it can become difficult to adjust an employee’s SBC.

Additionally, there are other, more technical reasons why a company might want to split its stockalso. High-priced stocks can be problematic for options traders, leading to illiquid trading on the stock market 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 stock? and is it a buy now?

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

In any case, investors should take a close look at Netflix right now. The company is very high as revenue growth has returned and operating margin has increased after enduring a difficult period of results in 2022. The company has clearly turned the corner and is outperforming many of its competitors in the streaming wars. In short, I think Netflix remains a solid buy-and-hold asset for long-term investors.