Why are stock splits so popular?
Well, for starters, there's some evidence to suggest stocks perform better after a stock split. And while it's far from an established fact, investors should know that.
That's to say nothing of the most obvious opportunity stock splits create: The chance for investors to buy shares at a lower price.
With that in mind, let's examine one stock that could be on the verge of a stock-split announcement: Netflix (NFLX +0.14%).
Image source: Getty Images.
A quick refresher on stock splits
Before we dive into why Netflix might be about to split its stock, let's review what a stock split is.
Crucially, a stock split doesn't change any of a company's underlying fundamentals -- it simply alters the number of shares outstanding and their price.
To understand this, imagine a dollar bill. Everyone understands a $1 bill is worth $1. Similarly, 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 quarters, rather than one bill.
Stock splits work the same way.
If a company's stock is trading at $400 and it executes a 4-for-1 stock split, each shareholder will receive four new shares (each worth $100) in exchange for one old share.
The company's fundamentals, including revenue, profits, and cash flow, are unaffected by the change.
Why Netflix might be ready to split
OK, so now that we've recapped what a stock split is, let's cover why Netflix appears primed to announce one.
First off, it's worth pointing out that Netflix hasn't done a stock split in years -- nearly a decade, in fact. The company last split its shares in 2015, performing a 7-for-1 stock split in July 2015.
Since then, Netflix hasn't split its shares, which helps explain why (as of this writing) the company's stock trades at more than $700 a share. That's a lot to shell out for a single share, and Netflix stock has been making new all-time highs, but there are other reasons the company may want to perform a split.
For example, companies often issue stock-based compensation (SBC) to employees. In the case of Netflix, the company issued $339 million in SBC in 2023. However, if a company's stock price rises too high, it can become challenging to fine-tune an employee's SBC.
Furthermore, there are other, more technical reasons for the company to want to split its stock, too. High-priced stocks can be problematic for options traders, leading to illiquid trading on exchanges as the bid/ask spread on the stock widens.
In short, companies often like to keep their stock price between $100 to $300 to avoid these complications.
Will Netflix split its stock and is it a buy now?
In short, yes, I believe Netflix will announce a stock split and it may come as soon as October. The company reports its next round of quarterly earnings results on Oct. 17, and that would be an obvious time for the company to break news on an upcoming stock split.
NASDAQ: NFLX
Key Data Points
In any event, investors should give Netflix a close look right now. The company is riding high as its revenue growth has returned and its operating margin has soared after enduring a rough patch of results back in 2022. Clearly, the company has turned the corner and is outperforming many of its competitors in the streaming wars. In a nutshell, I think Netflix remains a great buy-and-hold stock for long-term investors.
