Stock splits have surged in popularity recently. This practice was commonplace in the 1990s, but fell out of fashion before experiencing a resurgence.
Investors are understandably intrigued by stock splits, as they are historically a sign of a company performing at a high level. Typically, this is evidenced by years of strong business and financial results, followed by a subsequent increase in its stock price -- putting it out of reach of everyday investors.
Stock splits make shares more affordable for shareholders, but there's another reason investors are drawn to these companies. Businesses with strong track records generally continue to deliver market-beating returns. Stock-split stocks generate returns of 25%, on average, in the year following the announcement, compared with 12% average gains for the S&P 500 (^GSPC 1.18%), according to Bank of America analyst Jared Woodard.
Let's look at two recent stock-split stocks that are currently on sale and still have room to run, according to Wall Street.
Image source: Netflix.
Stock-split buy No. 1: Netflix -- 62% implied upside
Netflix (NFLX 0.18%) stock has been a long-term winner for patient investors, but shareholders have endured periods of significant volatility. The stock has gained 810% over the past decade, which surely factored into management's decision for a 10-for-1 stock split.
However, Netflix stock has slumped 38% from its peak, driven lower by concerns about the company's proposed acquisition of certain studio and content assets from Warner Bros. Discovery. Paramount Skydance initiated a hostile takeover bid of Warner Bros. in response.
Investors fear the situation could devolve into a nasty bidding war. Still, Netflix has a long history of walking away from content deals it considers too pricey, and I don't think this one will be any different.
The company's results have been consistently strong. In the fourth quarter, Netflix generated record revenue of $12 billion, up more than 17% year over year, marking the company's speediest pace of growth since early 2021. This drove diluted earnings per share (EPS) of $0.56 up 30%. Management is guiding for first-quarter revenue of $12.15 billion and EPS of $0.76, both up 15%.
NASDAQ: NFLX
Key Data Points
Wall Street is bullish about Netflix's prospects. Of the 44 analysts who offered an opinion in January, 68% rate it a buy or strong buy. Furthermore, Wall Street's average price target on the stock is about $112, implying additional upside of 34%.
However, BMO Capital analyst Brian Pitz maintains an outperform (buy) rating and a price target of $135 on Netflix stock, suggesting potential upside of 62% compared to Thursday's closing price. The analyst cites the company's solid results and its growing ad revenue, which it expects to double to $3 billion this year, accounting for 6% of Netflix's total revenue.
Netflix stock is currently trading for 27 times forward earnings, its lowest valuation in nearly two years. Add to that the company's long track record of consistent execution, and it's easy to see why the stock is a buy.
Stock-split buy No. 2: ServiceNow -- 123% implied upside
ServiceNow's (NOW 1.96%) inclusion here might be a surprise, considering the stock has plunged 48% over the past year (as of this writing), shedding its lofty valuation. Late last year, however, the stock traded above $800 per share, which explains the rationale behind the 5-for-1 stock split.
ServiceNow provides cloud-based software tools to automate repetitive tasks and streamline workflows. Like many software stocks, ServiceNow has been rocked by fears that its business will be disrupted by artificial intelligence (AI). Yet the company's results paint a different picture.
In the fourth quarter, ServiceNow delivered revenue of $3.53 billion, up 21%, driving adjusted basic EPS to $0.92, up 24%. Perhaps as importantly, ServiceNow's remaining performance obligation (RPO) -- or contractually obligated revenue that hasn't been recognized -- climbed 27% to $24.3 billion. When RPO is outpacing revenue growth, it suggests future growth will accelerate.
NYSE: NOW
Key Data Points
Wall Street remains bullish on ServiceNow. Of the 45 analysts who offered an opinion in January, a whopping 91% continue to rate the stock a buy or strong buy. Furthermore, analysts' average price target on the stock is about $200, implying a potential upside of 72%.
However, Citizens analyst Patrick Walravens maintains an outperform (buy) rating and a price target of $260 -- the most bullish among his Wall Street colleagues -- suggesting a potential upside of 123%. He cites the company's "attractive financial profile" and its 2026 growth forecast for his bullish stance.
Furthermore, ServiceNow has shed its lofty valuation and is currently trading for 28 times forward earnings. That, combined with the company's intriguing growth prospects, suggests ServiceNow is worth a look.
