When a company creates a substantial amount of value over the long run, its stock price can soar into the hundreds or even thousands of dollars, which makes it hard for smaller investors to buy (unless they use a broker that offers fractional shares). As a result, the company might opt for a stock split, which increases the number of shares in circulation and organically reduces its price per share by a proportional amount.
It's important to remember that the move is entirely cosmetic, and it doesn't change the underlying value of the company. However, splits often result in a short-term uptick in stock price as a broader investor base swoops in to buy.
Nvidia executed a 10-for-1 split in June, when its stock soared above $1,200 following an incredible run of value creation on the back of artificial intelligence (AI). Now, investors can buy one share of Nvidia for just $126. A long list of other tech giants have used stock splits in the past, including Microsoft, Apple, Amazon, and Tesla, to name a few.
I think Netflix (NFLX +0.96%) and Meta Platforms (META +0.22%) could each explore a split soon because their stocks trade at $690 and $539, respectively, and could go much higher.
Image source: Getty Images.
1. Netflix
Netflix is the world's largest streaming platform with 269.9 million subscribers. Walt Disney is a distant second with 153.6 million members for Disney+, and it's unlikely to ever catch up given the breadth of Netflix's content catalog and its enviable operating efficiency.
Netflix is the only stand-alone streaming provider generating a consistent profit. It delivered $6.4 billion in net income over the last four quarters from $34.9 billion in total revenue, which means it can invest heavily in content to attract more users without burning through cash. In fact, the company plans to spend $17 billion this year to produce and acquire content, whereas Disney is cutting billions of dollars from its budget.
Netflix's budget includes a growing foray into live programming. The Roast of Tom Brady was one of its recent successes, with 2 million viewers when it aired live in May. The platform could top that figure when it shows the Jake Paul vs. Mike Tyson boxing match in November, and potentially again on Christmas Day with two live NFL games.
For an entire decade beginning in 2025, Netflix will also be the home of World Wrestling Entertainment (WWE), which includes several live events each year.
NASDAQ: NFLX
Key Data Points
Over the past two years, Netflix has focused on attracting new subscribers at the lower end of the income spectrum with cheaper membership tiers.
First, its $7.99 monthly sharing plan is capturing some of the 100 million households that were borrowing Netflix for free from a friend or family member. Second, a $6.99 monthly plan is supplemented by advertising, and this accounted for 40% of all new sign-ups in the recent first quarter of 2024 (ended March 31) in countries where it's available.
Netflix says the ad tier monetizes at roughly the same rate as the $15.49 standard tier. Regular subscribers don't grow more valuable over time unless it increases prices, but ad-tier subscribers definitely could.
The streamer accounts for only 8.1% of TV viewing time in the U.S., so there is still plenty of room to grow, and it will be able to sell more ads (and charge more for them) as it occupies more screen time.
With around $337 billion forecast to be spent on TV advertising this year alone, according to Statista, advertising could be one of Netflix's largest financial opportunities ever.
The stock trades at $690 as of this writing, on the back of a 57% gain over the past year. It could soon be trading at over $1,000 if it continues growing at that pace, so a stock split seems inevitable eventually. The company is no stranger to splits, having used them in 2012 and 2015.
2. Meta Platforms
Meta Platforms is the only company valued at more than $1 trillion that hasn't executed a stock split to date. It went public in 2012 priced at $38, and it has since climbed 1,321% to $539 as of this writing, so it isn't for a lack of value creation.
Meta is home to social media platforms Facebook, Instagram, WhatsApp, Messenger, and more, which serve 3.2 billion people every day. The company is a cash generating machine, bringing in $45.7 billion in net income over the last four quarters from $142.7 billion in revenue. But its biggest financial opportunity might still be ahead of it.
Meta turned its attention to AI last year. It built the world's most popular open-source large language model (LLM), called Llama, and it powers the new Meta AI chatbot, which is integrated into its social platforms. Users can call upon Meta AI to answer complex questions, generate images, and recommend restaurants or gift ideas. It can even join your group chat.
NASDAQ: META
Key Data Points
Meta AI is powered by the latest Llama 3 LLM, but the next generation is already in training and could unlock new capabilities. Eventually, every business using Meta's apps could have its own personalized chatbot to deal with questions from customers, and potentially even make sales.
Meta is an expert at monetizing new features (just look at the success of Stories and Reels), so I bet it will find a number of ways to make money from its AI products and services.
The stock is cheap right now, at a price-to-earnings (P/E) ratio of 31, a slight discount to the 32.4 P/E of the Nasdaq-100 index. But it could get even cheaper, because Wall Street thinks the company will generate $23.09 in earnings per share in 2025, which places the stock at a forward P/E of 23.4. In other words, Meta stock will have to rise 38% by the end of next year just to trade in line with the Nasdaq-100.
That would place the stock at a record high of $745, and given the company's positive momentum, I wouldn't be surprised to see a stock split before that point.
