A resurgence in the popularity of stock splits has been one of the most intriguing market trends in recent years. While this was a common practice in the late 1990s, it had subsequently fallen out of favor before enjoying a renaissance in recent years. Companies generally embark upon this course after years or even decades of strong operating and financial results have driven the stock price out of reach of everyday investors.
While a stock split doesn't change the intrinsic value of the business, it makes shares more affordable for employees and everyday investors, which is often the reason companies cite as the primary motivation behind the split.
Historically, top-performing companies continue to generate robust returns. Businesses that conduct stock splits generate stock price increases of 25%, on average, in the year following the announcement, compared with average gains of 12% for the S&P 500, according to a report issued by Bank of America analyst Jared Woodard.
Let's look at two recent stock-split stocks that still have room to run, according to Wall Street.
Image source: Netflix.
Stock-split buy No. 1: Netflix -- 51% implied upside
Investors in Netflix (NFLX +0.34%) have been amply rewarded for sticking with the streaming pioneer, and that isn't limited to some dusty past. The stock has gained 23% so far this year and 755% over the past decade, which surely factored into management's decision to conduct a 10-for-1 stock split.
Netflix stuck to its formula of expanding its streaming library, which attracted new subscribers, and used the resulting profits to acquire new content. Wash. Rinse. Repeat. More recently, Netflix introduced a lower-cost ad-supported tier and allowed subscribers to add an extra member outside their household for a nominal fee. It also added live sports, attracting new viewers.
The company's results paint a compelling picture. In the third quarter, Netflix generated record revenue of $11.5 billion, up 17% year over year, marking its fastest pace of growth since early 2021. Excluding a one-time, non-cash tax charge, its diluted earnings per share (EPS) jumped 27%. Management expects its robust growth to continue, guiding for a fourth-quarter revenue of $11.96 billion, up 17%, and EPS of $5.45, which would represent a 28% increase.
Wall Street is equally optimistic when it comes to Netflix's future prospects. Of the 49 analysts who offered an opinion in November, 69% rate it a buy or strong buy. Furthermore, Wall Street's average price target on the stock is about $135, implying an additional 27% upside.
NASDAQ: NFLX
Key Data Points
However, one analyst has set his sights higher. Pivotal Research Group analyst Jeffrey Wlodarczak has a split-adjusted price target of $160 -- the highest among his Wall Street peers -- which suggests Netflix stock could climb as much as 51% from its current price. His thesis is simple: "Our positive Netflix investment view remains unchanged. Netflix remains underpenetrated globally, offers an extremely compelling price-to-entertainment value (that is continually improving), boosted by their ad-supported offering."
Netflix stock isn't cheap, currently trading for 33 times next year's expected earnings. While that's certainly a premium, the company's long track record of performance, consistent execution, and vast opportunity illustrate why it's deserving of a premium.
Stock-split buy No. 2: ServiceNow -- 64% implied upside
Investors might be surprised to find ServiceNow (NOW 3.22%) on the list. After all, the stock is down nearly 24% over the past year (as of this writing), largely due to last year's inflated valuation, which wasn't accompanied by a corresponding surge in profits (yet). Despite its current downturn, the stock still boasts a price above $800 (as of this writing), which explains the logic behind the 5-for-1 stock split.
ServiceNow's cloud-native platform helps businesses streamline workflows and automate repetitive tasks, making artificial intelligence (AI) a cornerstone of its strategy. The company offers turnkey applications for a multitude of business processes, serving customer service, human resources, IT, and finance and accounting departments, among others. By providing a centralized system for managing requests, ServiceNow can boost efficiency, which saves businesses time and money.
The results speak for themselves. In the third quarter, ServiceNow reported revenue of $3.4 billion, an increase of 22%, most of which was subscription revenue, which sets the stage for future growth. This drove adjusted EPS to $4.86, a 29% increase.
More telling was the company's remaining performance obligation (RPO) -- or contractually obligated sales that hasn't yet been includedin revenue -- which climbed 24% to $24.3 billion. When RPO is outpacing current growth, it suggests future growth will likely accelerate, building on the current foundation.
NYSE: NOW
Key Data Points
Wall Street is clearly bullish when it comes to ServiceNow. Of the 45 analysts who offered an opinion in November, a stunning 91% rate the stock a buy or strong buy. Furthermore, Wall Street's average price target on the stock is about $1,155, implying an additional 44% upside.
However, one analyst is much more bullish than his peers. Morgan Stanley analyst Keith Weiss maintains an overweight (buy) rating and recently increased his price target to $1,315 -- the most bullish among his Wall Street colleagues -- suggesting a potential 64% upside. He cites the company's "strong execution," saying ServiceNow is well positioned to thrive over the coming year.
ServiceNow has shed some of its lofty valuation and is currently selling for 39 times next year's expected earnings. While that's still a premium, if the company can meet Wall Street's ambitious targets over the coming 12 to 18 months, today's price will ultimately prove to be a bargain.
