Stock Split Watch: Is Netflix Next?

Why are stock splits so popular?

Well, for starters, There is some evidence for this Stocks perform better after a stock split. And although it is far from it an established factThis is what investors should know.

That means Nothing of most apparently Stock splits create opportunities: the chance for investors to buy shares at a cheaper price.

With that in mind, let's take a look at a stock that could be about to announce a stock split: Netflix (NFLX -1.18%).

Image source: Getty Images.

A quick refresher on stock splits

Before we delve deeper into why Netflix may be about to split its stock, let's take a look at what a stock split is.

What is crucial is that nothing changes as a result of a stock split any of the underlying fundamentals of a company – it simply changes the number of shares issued and their price.

To understand this, imagine a dollar bill. Everyone knows that a $1 bill is worth $1. 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 Quarter, instead of an invoice.

Stock splits work the same way.

If a company's stock is trading at $400 and It When a 4-for-1 stock split occurs, each shareholder receives four new shares (worth $100 each) in exchange for one old share.

The company's fundamentals, including sales, profits and cash flow, are not affected by the change.

Why Netflix may be ready to break up

OK, now that we've recapped what a stock split is, let's dive into why Netflix seems poised to announce one.

First out ofIt's worth pointing out that Netflix didn't do it a stock split in years – almost a decadeActually. The company last split its shares in 2015 and completed a 7-for-1 stock split in July 2015.

NFLX data from YCharts

Since then, Netflix has not split its shares, which explains why the company's stock is trading at more than $700 per share (as of this writing). That's a lot to spend on a single share, and Netflix stock has reached new all-time highs, but there are other reasons why the company might want to do a split.

For example, companies often provide their employees with stock-based compensation (SBC). In the case of Netflix, the company issued $339 million worth of SBC in 2023. However, if a company's stock price rises too much, it can become difficult to optimize an employee's SBC.

Additionally, there are other, more technical reasons why the company may want to split its sharesto. High-priced stocks can be problematic for options traders and lead to illiquid trading on exchanges as the stock's bid-ask spread widens.

In short, companies often want to keep their stock price between $100 and $300 to avoid these complications.

Will Netflix split its shares? And Is it a purchase now?

In short: Yes, I believe Netflix will announce a stock split, possibly as early as October. The company reports its next quarterly results on October 17, and that would be an obvious time for the company to share news of an impending stock split.

In any case, investors should now take a close look at Netflix. The company is on a roll as its revenue growth has returned and its operating margin has surged after a difficult earnings stretch in 2022. The company has clearly turned the corner and is outperforming many of its competitors in the streaming wars. In short: I think Netflix remains a great buy-and-hold stock for long-term investors.