On Nov. 17, a 10-for-1 stock split on Netflix (NFLX 10.16%) went into effect, marking the streaming giant's first split in over a decade. But despite the enthusiasm for the split, Netflix stock actually declined by 0.8% during the session.
Here's why investors shouldn't be concerned about the tempered reaction to the split, and why Netflix remains a top buy now.
Image source: Getty Images.
Expectations are everything
If a company's value were a pie and the number of slices represented shares, then stock splits essentially take those slices and cut them into smaller pieces. They don't change the value of the pie, but they do make it easier to buy one full share of the company, which has both practical and psychological benefits.
They can also indicate managerial confidence that the stock price will go up over time. This is especially true with Netflix, given its goal of reaching a $1 trillion market cap by 2030.
For these reasons, investors typically react favorably to stock splits. However, that reaction can occur in the sessions following the initial announcement date, not on the day the split actually takes effect.
For example, Netflix popped 2.8% on Oct. 31, which was the session after it announced the stock split.
Similarly, when Nvidia's stock split took effect on June 11, 2024, the stock fell 0.7%. But it had surged 9.3% on May 23, 2024, which was in the session following the stock split announcement.
The performance of a stock on the day its split goes into effect arguably has less to do with the split itself and more to do with what is happening in financial markets at the time. The Nasdaq Composite fell 0.8% on Monday, and the S&P 500 slipped 0.9%. So Netflix's slight sell-off was probably more of a reaction to that than anything.
In sum, the reaction to the stock split is more pronounced when the split is announced, rather than when it takes effect.
Netflix remains a high conviction buy
Stock splits can make a company more convenient to invest in, but they don't impact the underlying investment thesis.
NASDAQ: NFLX
Key Data Points
Netflix's international and highly loyal subscriber base produces a relatively predictable stream of cash flow, which the company uses to responsibly budget its content spending and operating expenses. However, to keep subscribers around, Netflix must create engaging content that appeals to a variety of interests.
The company has mastered the art of producing content that caters to specific interests while mixing in some big hits with mass market appeal. For example, KPop Demon Hunters has become a global sensation with merchandise and music -- extending its value far beyond keeping subscribers engaged for 96 minutes.
All told, Netflix remains an excellent buy, especially for investors looking to diversify their portfolios with high-octane growth stocks outside of major themes like cloud computing and artificial intelligence.
