Heading into Netflix's (NFLX +1.69%) third-quarter earnings report, there was some speculation that the company would announce a stock split.
After all, Netflix's share price had soared past $1,000 earlier this year, as it has clearly put the post-pandemic concerns about slowing growth to rest. Additionally, nearly all of its other big tech peers, like Amazon, Alphabet, and Apple, have issued stock splits in recent years, and Netflix has a history of doing so, most recently in 2015.
However, the stock-split announcement didn't come in the earnings report. Instead, Netflix surprised investors on Thursday by announcing a 10-for-1 stock split.
Image source: Netflix.
Netflix is splitting its stock
The streamer said the board of directors approved a 10-for-1 stock split in order to reset the market price to a range that's more accessible to employees. The stock will begin trading on a split-adjusted basis on Nov. 17. Netflix shares rose 3.1% on Friday in response to the news, which was a somewhat muted response compared to some other recent stock splits.
Stock splits don't do anything to fundamentally change the value of a stock or directly impact the business. It's just a way of dividing the pie into more pieces. As Netflix said, the move will make individual shares more accessible to employees and retail investors, which is a good thing, both for the stock and for investors.
There is some evidence that stocks outperform in the 12-month period that follows a stock split, but that may be because of investor perception or because management typically chooses to enact a stock split when they are confident in the growth of the business and the stock continuing to go up.
While the individual share price does get lower, the stock isn't any cheaper relative to real financial metrics like earnings or dividends, which is ultimately what counts.
NASDAQ: NFLX
Key Data Points
Is Netflix a buy?
The stock split alone isn't a reason to buy Netflix stock, but there are plenty of good reasons to grab some shares, which will get easier after the split goes through.
Netflix is looking as dominant as ever as it continues to deliver mid-teens revenue growth and strong profit margins. Its push into advertising has clearly paid off and opened another runway for growth, and its experiments with things like live events also seem to be resonating with its audience. The new KPop Demon Hunters blockbuster movie could lead to a durable revenue stream from branded products like toys as well.
Finally, Netflix looks reasonably valued now, down 16% from its peak earlier this year, and its earnings per share is expected to grow by more than 25% through next year.
Stock split or no split, the streaming giant looks like a smart buy.
