Stock splits generally attract a lot of attention from the investment community. In fact, stocks that have undergone a split witness an increase in trading activity immediately after the event.
In recent years, several high-profile tech companies, including Tesla, Nvidia, Broadcom, Amazon, AppleAnd Alphabet have undergone stock splits.
Here’s what investors need to know about stock splits, and why I think Netflix (NASDAQ:NFLX) could be a candidate to split its shares sooner or later.
Stock splits sound complicated, but rest assured that the mechanics surrounding a split are easy to understand.
When a company announces its plan to split its stock, it will also share an important ratio with investors. For example, if a company says it is going to do a 10-for-1 split, all it means is that the number of shares outstanding will increase by a factor of 10 while the stock price rises. reduced with the same factor 10.
Because the number of shares outstanding and the stock price are changed by the same factor, the company’s valuation (i.e., market capitalization) remains unchanged.
After a split, investors often view the lower share price as more affordable. For this reason, after a split, stocks tend to witness increased demand, which keeps the stock price rising.
Ironically, this means that many investors may end up paying for the stock after the split at a higher valuation than where the stock was trading before the split took effect.
In 2024, Netflix’s shares rose 86% – almost three times as much as in recent years. S&P500 (SNPINDEX: ^GSPC) And Nasdaq Composite (NASDAQINDEX: ^IXIC). As I write this, the stock price of $904 is approaching an all-time high.
NFLX data Ygraphs.
In the chart above, I have illustrated the entire history of Netflix’s stock price and annotated the chart with the company’s stock split history. Since going public, it has split its shares twice (the purple circles with the letter “S”).
The last split was in July 2015. Since then, the share has increased more than tenfold.
Given that the stock is within shouting distance of $1,000 and the momentum seems unstoppable at the moment, I wouldn’t be surprised if some investors start looking for alternatives in the media and entertainment space given the expensive nature of Netflix.
To me, the recent surge in Netflix stock valuation seen above could deter investors from buying the stock. For this reason, I would not be surprised if management opted for a stock split in the short term.