Stock splits generally get a lot of attention from the investment community. In fact, stocks that have witnessed a split increased trading activity levels immediately after the event.
In recent years, a number of high-profile technology companies including Tesla, Nvidia, Broadcom, Amazon, An applea Alphabet have had stock splits.
Here's what investors need to know about stock splits, and why I think Netflix (NASDAQ: NFLX) he could be a candidate to share his shares sooner rather than later.
Stock splits sound complicated, but rest assured 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 implement a 10-for-1 split, all this means is that the outstanding share count will rise by a factor of 10, while the price of the stock in reduce by the same factor of 10.
Since the number of shares outstanding and the stock price are changed by the same factor, the valuation of the business (ie, its market cap) has not changed.
After a split, investors often find the lower share price more affordable. For this reason, stocks after a split tend to witness increased demand, meaning that the share price continues to gain.
Ironically, this means that many investors may actually pay for the stock at a higher valuation after the split versus where the stock was trading before the split took effect.
In 2024, Netflix shares increased by 86% – almost tripling the gains seen in the S&P 500 (SNPINDEX: ^GSPC) a Nasdaq Composite (NASDAQINDEX: ^IXIC). As I write this, the stock price of $904 is heading towards an all-time high.
NFLX data from YCharts.
In the chart above, I've plotted the entire history of Netflix's stock price and annotated the graph with the company's stock split history. Since going public, it has split its stock on two occasions (the 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 shouting distance of $1,000 and the momentum currently looks unstoppable, I wouldn't be surprised if some investors look for alternatives in the media and entertainment space given Netflix's expensive nature.
To me, the recent valuation expansion in Netflix stock, as seen above, could deter investors from buying the stock. For this reason, I would not be surprised to see managers choose to split stock in the near term.