Why do companies opt for stock splits?

Studies suggest stocks tend to perform better post-split, though this is not set in stone, alerting investors to the possibility. A salient factor is the opportunity for investors to acquire shares at a reduced price.

With this in mind, let’s explore the prospects of an impending stock-split disclosure by Netflix (NASDAQ: NFLX).

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Explaining Stock Splits

Before delving into Netflix’s potential stock split, let’s revisit the concept of a stock split.

Essentially, a stock split does not influence any aspect of a company’s core fundamentals; rather, it adjusts the volume of outstanding shares and their valuation.

Consider a dollar bill. A $1 bill holds the value of $1. Likewise, if you exchange the bill for four quarters, the value remains $1, just in a different form consisting of four quarters instead of a single bill.

Similarly, stock splits operate on the same principle.

If a company’s stock trades at $400 and undergoes a 4-for-1 stock split, each stockholder acquires four new shares (at $100 each) in place of one former share.

The company’s fundamental metrics such as revenue, profits, and cash flow remain unaltered by this revision.

Indications Netflix May be Poised for Dividing Shares

Having clarified the concept of stock splits, let’s consider why Netflix is potentially gearing up to unveil one.

Primarily, Netflix has refrained from executing stock splits for an extended period, nearing a decade to be precise. The last stock split transpired in 2015 when the company implemented a 7-for-1 stock split in July of that year.

NFLX data by YCharts

Since that juncture, Netflix has abstained from splitting its shares, elucidating the current high trading value (over $700 per share at recent evaluation). This seemingly hefty cost per share, as Netflix’s stock continually hits new record highs, along with various other reasons, might motivate the company to undertake a split.

For instance, corporations sometimes allocate stock-based compensation (SBC) to employees. Netflix, for instance, dispensed $339 million in SBC during 2023. Yet, escalated stock prices could pose challenges in calibrating an employee’s SBC.

Moreover, there are additional technical rationales for pursuing a stock split. Exorbitantly priced stocks can pose difficulties for options traders, potentially inducing inefficient trading on exchanges due to widened bid/ask differentials.

Generally, firms prefer maintaining their stock prices within the $100 to $300 range to circumvent such intricacies.

Prospects of Netflix’s Stock Split and Investment Viability

Indeed, I anticipate Netflix will unveil a stock split, potentially as early as October, coinciding with its forthcoming quarterly earnings disclosure on Oct. 17. This event would likely serve as a fitting occasion for the company to announce such a development.

Irrespective, investors should scrutinize Netflix diligently at this moment. The company is presently enjoying a notable upsurge in revenue growth and operational margins post a turbulent phase in 2022. Evidently, Netflix has navigated this period adeptly, outperforming several competitors in the streaming domain. In essence, I maintain that Netflix remains an excellent long-term investment prospect for discerning investors.

Should You Allocate $1,000 towards Netflix?

Before embracing Netflix stock, ponder over this: