Stock splits generally receive a lot of attention from the investment community. In fact, stocks that underwent a split saw increased levels of trading activity immediately after the event.
In recent years, many high-profile technology companies have emerged including Tesla, Nvidia, Broadcom, Amazon, appleand alphabet I submitted Stock splits.
Here’s what investors need to know about stock splits, and why I think so Netflix (Nasdaq: NFLX) It could be a candidate for a stock split sooner rather than later.
Stock splits seem complicated, but rest assured that the mechanics involved in the split are easy to understand.
When a company announces its plan to split its stock, it will also share a significant percentage with investors. For example, if a company says it will implement a 10-for-1 split, all this means is that the number of shares outstanding will increase by a factor of 10, while the stock price is reduced By the same factor 10.
Since the number of shares outstanding and the stock price change by the same factor, the company’s valuation (i.e. its market value) remains unchanged.
After a split, investors often view a lower stock price as being more affordable. For this reason, shares after a split tend to be in greater demand, causing the stock price to continue to rise.
Ironically, this means that many investors may actually end up paying for the stock at a higher valuation after the split than where the stock was trading before the split took effect.
In 2024, Netflix shares are up 86%, nearly tripling the gains the company saw in 2024. Standard & Poor’s 500 (SNPINDEX: ^GSPC) and Nasdaq Composite (NASDAQ: ^IXIC). As I write this, the stock price of $904 is heading toward an all-time high.
NFLX Data by YCharts.
In the chart above, I’ve illustrated the full history of Netflix’s stock price and annotated the chart with the date of the company’s stock split. Since going public, it has split its stock on two occasions (purple circles with the letter “S”).
The last split was in July 2015. Since then, the stock has risen more than tenfold.
Given that shares are within striking distance of $1,000 and the current momentum is unstoppable, I wouldn’t be surprised if some investors are looking for alternatives in the media and entertainment space given the expensive nature of Netflix.
To me, the recent valuation expansion in Netflix stock, as seen above, could discourage investors from buying the stock. Because of this, I wouldn’t be surprised to see management opt for a stock split in the near term.
It’s important to note that the Netflix stock split is just speculation on my part. Just because I think such a decision makes sense, doesn’t mean it will happen.
Although the company’s forward P/E of 38 isn’t exactly a bargain, I think the premium is warranted. The company’s recent expansion in Live sporting events Plus its upcoming immersive experiences venture, dubbed Netflix House, showed me that the company is looking to diversify its platform beyond producing original content and licensing popular syndicated shows and movies from distributors.
Regardless of whether the split happens or not, I still see Netflix as a great opportunity for long-term investors to buy and hold.
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Susan Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Spatacco He has positions at Alphabet, Amazon, Apple, Nvidia, and Tesla. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Netflix, Nvidia, and Tesla. The Motley Fool recommends Broadcom. The Motley Fool has Disclosure policy.
Prediction: This will be the first tech company to do a stock split in 2025. (Hint: It’s not in the “Magnificent Seven.”) Originally published by The Motley Fool