Stock split or not, Netflix stock might be worth considering.
Why are stock splits so popular?
Well, for starters, there is some evidence to suggest it stocks do better after a stock split. And while it is far from an established factInvestors should know that.
That is to say nothing of the most obvious Stock split opportunities create: The opportunity for investors to buy shares 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 -0.91%).
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A quick refresher on stock splits
Before diving into why Netflix might be about to split its stock, let’s review what a stock split is.
Crucially, a stock split does not change any of the underlying fundamentals of a company – it simply changes the number of outstanding shares and their price.
To understand this, imagine a dollar bill. Everyone understands that a $1 bill is worth $1. In the same way, 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. neighborhoods, instead of an invoice.
Stock splits work the same way.
If a company’s stock is trading at $400 and him performs a 4-for-1 stock split, each shareholder will receive four new shares ($100 each) in exchange for one old share.
The fundamentals of the company, including revenues, profits and cash flow, are not affected by the change.
Because Netflix might be ready to share
OK, so now that we’ve covered what a stock split is, let’s cover why Netflix is looking to announce one first.
First offit is worth noting that Netflix he didn’t do it a stock divided into years – almost a decadein fact. The company split the last part of its shares in 2015, performing a 7 for 1 stock split in July 2015.
NFLX data from YCharts
Since then, Netflix has not shared its shares, which helps explain why (as of this writing) the company’s shares trade at more than $700 per share. It’s a lot to throw for a single part, and the shares of Netflix made new highs of all time, but there are other reasons that the company may want to do a split.
For example, companies often issue stock-based compensation (SBC) to employees. In the case of Netflix, the company issued $339 million in SBC in 2023. However, if the price of a company’s shares rises too high, it can be challenging to refine the SBC of an employee.
In addition, there are other more technical reasons for the company to want to share its stockas well. High-priced stocks can be problematic for options traders, leading to illiquid trading on the exchanges as the bid/ask spread on the stock widens.
In short, companies often like to keep their share price between $100 to $300 to avoid these complications.
Netflix will split its stock and is it a buy now?
In short, yes, I believe Netflix will announce a stock split and it may come as early as October. The company reports its next round of quarterly earnings results on October 17, and this would be an obvious time for the company to break news about an upcoming stock split.
However, investors should give Netflix a close look now. The company is riding high as its revenue growth has returned and its operating margin has grown after having mostly a piece of results in 2022. Clearly, the company has turned the corner and surpasses many of its competitors in the streaming wars. In short, I think Netflix remains a great buy and hold stock for long-term investors.
Jake Lerch has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Netflix. The Motley Fool has a disclosure policy.