Stock splits generally attract a lot of attention from the investment community. In fact, stocks that have undergone a split witness increased levels of trading activity immediately following the event.
In recent years, several high-profile technology companies, including Tesla, Nvidia, Broadcom, Amazon, Appleand Alphabet have passed stock split.
Here’s what investors need to know about stock splits and why I think so Netflix (NASDAQ: NFLX) could be a candidate for a stock split sooner rather than later.
A stock split sounds complicated, but rest assured that the mechanics of the split are easy to understand.
When a company announces its stock split plan, it will also share an important ratio with investors. For example, if a company says it will do a 10-for-1 split, all that means is that the number of shares outstanding will increase by a factor of 10, while the share price reduced by the same factor of 10.
Since the number of shares outstanding and the share price change by the same factor, the valuation of the business (ie its market capitalization) remains unchanged.
After a split, investors often perceive the lower share price as more affordable. For this reason, post-split shares tend to be in higher demand, resulting in a further rise in the share price.
Ironically, this means that many investors could actually pay for the stock at a higher value after the split than where the stock was trading before the split took effect.
In 2024, Netflix shares rose 86% — nearly triple the gains recorded in S&P 500 (SNPINDEX: ^GSPC) and Nasdaq Composite (NASDAQINDEX: ^IXIC). As I write this, the share price of $904 is approaching an all-time high.
NFLX data per YCharts.
In the chart above, I’ve illustrated the entire history of Netflix’s stock price and labeled the chart with the company’s stock split history. Since going public, it has split its shares twice (purple circles with the letter “S”).
The last split was in July 2015. Since then, the stock has increased more than ten times.
Considering the stock is within $1,000 expectations and the momentum seems unstoppable right now, it wouldn’t surprise me to see some investors looking for alternatives in the media and entertainment space given the expensive nature of Netflix.
To me, the recent expansion in Netflix’s stock value, as seen above, could turn investors away from buying the stock. For this reason, I wouldn’t be surprised if management decided to do a stock split in the near future.
