Stock splits typically attract a lot of attention from the investment community. In fact, stocks that have undergone a split witnessed an increase in trading activity levels immediately following the event.
In recent years, several high-profile technology companies, including tesla, NVIDIA, Broadcom, Amazon, Appleand Alphabet have suffered stock splits.
Here’s what investors need to know about stock splits and why I think they netflix (NASDAQ: NFLX) could be a candidate to split its shares sooner rather than later.
Stock splits seem complicated, but rest assured, the mechanics of a split are easy to understand.
When a company announces its plan to split its shares, it will also share a significant proportion with investors. For example, if a company says it is going to execute a 10-for-1 split, all this means is that the number of shares outstanding will increase by a factor of 10, while the price of the stock will increase. reduced by that same factor of 10.
Since the number of shares outstanding and the stock price change by the same factor, the company’s valuation (i.e., its market capitalization) remains unchanged.
After a split, investors often perceive the lower stock price to be more affordable. For this reason, stocks after a split tend to experience greater demand, causing the stock price to continue rising.
Ironically, this means that many investors may end up paying for the stock at a higher valuation after the split compared to the stock’s price before the split took effect.
In 2024, Netflix shares soared 86%, nearly triple the gains seen in the S&P 500 (SNPINDEX: ^GSPC) and Nasdaq Composite (NASDAQ INDEX: ^IXIC). As I write this, the stock price of $904 is slowly approaching an all-time high.
NFLX data from YCharts.
In the chart above, I illustrated the complete history of Netflix 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 occurred in July 2015. Since then, the stock has risen more than tenfold.
Considering the stock is within striking distance of $1,000 and momentum currently appears unstoppable, I wouldn’t be surprised if some investors looked for alternatives in the media and entertainment space given the expensive nature of Netflix.
To me, the recent expansion in Netflix’s stock valuation, as seen above, could deter investors from buying shares. For this reason, I wouldn’t be surprised if management opted for a stock split in the near term.