Netflix Stock Split Announcement Expected This Thursday

For a company renowned for releasing entire seasons of captivating shows simultaneously, Netflix (NFLX -0.28%) understands that its audience craves instant gratification. As the first quarter earnings season approaches, investors in Netflix will need to exercise some patience. The leading global premium video streaming service is set to unveil its first-quarter results on Thursday afternoon. With the market closing for the weekend on Friday, investors will face a waiting period of four days before they can assess how the market reacts on Monday morning next week.

This extended trading holiday allows the market ample time to reflect on a potentially pivotal earnings release, which is not inherently problematic. Investing should be approached like a slow-cooked meal rather than a quick microwave fix. However, this scenario raises intriguing questions about whether the extra time might motivate Netflix to announce a long-awaited stock split, a move it hasn’t executed in nearly a decade.

Understanding the Mechanics of Stock Splits

Netflix takes the concept of stock splits quite seriously. Having been publicly traded for almost 23 years, the company has only executed two stock splits in its history. The first was a 2-for-1 split back in February 2004, just shy of two years after its initial public offering. The second, a more ambitious 7-for-1 split, occurred in the summer of 2015, reflecting the company’s significant growth.

The current trading price of Netflix shares is considerably higher than during any previous split decisions. This is a different era for stock market dynamics, as there is no longer the same imperative to maintain a stock price within an accessible double-digit range. Nevertheless, the notion of a stock split could still hold merit. Let’s delve into a few compelling reasons why a stock split might present more than just a superficial change for Netflix.

• The modern convenience of purchasing fractional shares has reduced barriers for individual investors looking to invest in high-value stocks like Netflix, which is nearing the $1,000 mark. However, this creates a significant barrier in the options market, where contracts typically represent a standard lot of 100 shares. For instance, owning nearly $100,000 worth of Netflix stock would be necessary to execute a single covered call.
• A few years back, the titans of the tech industry flaunted their soaring stock prices as symbols of success. However, this trend has reversed. Over the past five years, three of the four most valuable companies in the U.S. have opted for stock splits.
• While Netflix is unlikely to be added to the Dow 30 anytime soon, its current stock price makes such an inclusion improbable. The Dow 30 is a price-weighted index, meaning that Netflix’s price movements would affect the index at nearly double the rate of its highest-priced component. This would mean Netflix’s fluctuations could influence the index almost five times more than its most valuable constituent.

The list of reasons against a stock split is notably shorter, primarily because there is no compelling argument to maintain its high stock price.

Image source: Getty Images.

Could a Stock Split Be on the Horizon After a Strong Earnings Report?

Last year, Netflix shares experienced remarkable growth, nearly doubling in value. Following a stellar earnings report previously, the stock price surged but fell just short of breaching the $1,000 threshold. It did, however, achieve this milestone briefly a month later, even in the absence of any significant announcements. Currently, the stock is trading in the high triple digits, and it stands less than 3% away from crossing into the coveted four-figure territory.

If the board of directors at Netflix believes they have a strong earnings report on the way, it would be surprising if the topic of a stock split hasn’t been brought to the table for discussion. Back in January, the premium streaming pioneer provided guidance indicating an expected first-quarter revenue increase of 11%, targeting $10.4 billion. The anticipated earnings were projected to rise at a slower rate, estimated at $5.58 per share.

While these figures might not appear robust for a company whose stock has more than doubled since the beginning of last year, analysts are currently forecasting even higher numbers than the targets set by Netflix for the first quarter. Wall Street experts are now anticipating earnings of $5.66 per share with total revenues projected at $10.5 billion. Although this outlook may seem optimistic, it’s worth noting that Netflix has consistently exceeded earnings estimates in each of its four previous quarterly reports. The momentum is certainly in its favor.

Investors should approach the Thursday afternoon earnings update without the expectation that a stock split will automatically drive their shares higher. Netflix will need to deliver a solid report to justify any potential price increases. However, this moment might be ideal for such an announcement. A stock split could serve as a dramatic mic drop just before three days of trading silence during the extended market break. Netflix thrives on the excitement of binge-watching, yet sometimes it’s the anticipation that truly captivates its audience.