This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Key Points
- It's been a decade since Netflix's last stock split.
- Netflix is a high-octane growth stock that is also resistant to recessions.
- The investment thesis has never been stronger, making Netflix a buy for November.
With a share price over $1,100 and a decade since its last split, many investors have been wondering if Netflix (NASDAQ: NFLX) would split its stock in 2025 or 2026. And sure enough, the speculation ended on Oct. 30 when Netflix announced a 10-for-1 stock split, which was followed by a favorable reaction in Netflix's stock price on Oct. 31.
Netflix and nine other companies make up the "Ten Titans," which are 10 influential growth stocks that account for over 40% of the S&P 500. These industry-leading companies have crushed the broader market in recent years, and some have room to run even higher.
Here's why Netflix remains a top Titan to buy now, and the impact of the stock split on Netflix shareholders and potentially the Dow Jones Industrial Average.
Why stock splits matter
After the close of trading on Friday, Nov. 14, Netflix shareholders as of record on Nov. 10 will receive nine additional shares for every share held, with split-adjusted trading commencing at market open on Nov. 17. In other words, the size of the pie isn't changing. Instead, it will be cut into 10 times more slices.
Stock splits don't impact a company's value or change the underlying investment thesis. However, they aren't meaningless.
In its press release, Netflix said, "The purpose of the stock split is to reset the market price of the Company's common stock to a range that will be more accessible to employees who participate in the company's stock option program." Having a lower share price also makes it easier for individual investors to trade options on Netflix, since options are usually in 100-share increments. With a share price over $1,000, it would take over $100,000 in a cash-supported account to sell an option on Netflix.
A stock split can also increase a company's chances of getting added to the Dow. Amazon, Nvidia, and Sherwin-Williams were added to the Dow in 2024. And all three companies split their stocks in the last few years. With the median stock price in the Dow around $250 per share and a max price under $800, there's next to no chance that Netflix would be considered without splitting its stock because a price over $1,000 would significantly alter the dynamics of the price-weighted index. Granted, it's unlikely Netflix would be added anyway, since that would probably involve replacing Walt Disney. But the stock split does boost Netflix's chances.
Some consider all Dow companies to be blue chip stocks, even if they don't pay dividends. So being added to the Dow would cement Netflix's industry leadership and make it a core member of all four major indexes -- the S&P 500, Nasdaq Composite, Russell 2000, and the Dow.
Stock splits matter less today than in years past due to the widespread availability of fractional shares and low-cost trading. Fractional shares allow investors to commit a dollar amount in a stock rather than invest in per-share increments. And many brokerages offer zero-cost trading. In the past, stock splits made a big difference by lowering the entry point for individual investors -- effectively leveling the playing field and taking away an advantage previously held by institutions with multimillion-dollar portfolios.
Netflix is a high-conviction buy
Netflix's stock split is a vote of confidence that management believes the company has a long runway for earnings growth. The 10-for-1 ratio is a bit surprising as well. Last month, I predicted Netflix would issue a 7-for-1 split. But a 10-for-1 split puts the share price close to $100, which isn't necessarily a big deal, except that a big drop would push the stock price into double digits, which some investors view as a psychological barrier. Some institutions avoid investing in stocks below a certain price -- especially once they get in the single digits. So the 10-for-1 split is a signal from Netflix to Wall Street that it expects the stock price to go up over time.
Netflix hasn't been shy about valuation-based targets. Management set an internal goal to reach a $1 trillion market cap by 2030 and grow operating income faster than revenue -- thereby expanding operating margins. Netflix's market cap currently sits below half a trillion, mainly because the stock nosedived after its latest earnings report. Netflix took a $619 million charge due to a Brazilian tax dispute. But the operating results were exceptional -- reinforcing why Netflix is a terrific long-term buy.
Netflix continues to steadily increase earnings, expand its margins, and demonstrate pricing power even in an environment where consumer spending is strained. Chipotle Mexican Grill just fell a staggering 18% in 24 hours after announcing its quarterly earnings -- yet another example of consumers tightening discretionary spending on restaurants, goods, and services. By comparison, Netflix's latest quarterly results show that its membership remains a priority for many individuals and households.
A potential dividend-paying Dow stock
On its own, Netflix's stock split isn't a reason to buy or sell the stock, but it does affect how Netflix's employees and investors interact with the stock and improves its chances of one day being added to the Dow.
Instead of buying Netflix for its stock split, a better approach is to focus on the company's impeccable fundamentals. Netflix is a high-margin cash cow that's growing at an impressive rate despite a slowdown in discretionary spending, especially among lower- and middle-income households.
Netflix's global subscriber base allows it to produce expensive, high-quality content while still turning a huge profit. As Netflix matures, I could see the company begin to pay a steadily growing dividend. And if Netflix does eventually surpass $1 trillion in market cap, it may find its way into the Dow. Especially given that post-split, Netflix could double in price and still be right around the median price of a Dow stock.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
