A strong earnings report on Thursday might have Netflix celebrating a return to 2015 levels of success. Despite Netflix’s tendency to release entire seasons at once, its investors may need to exercise patience this earnings season. The premier video streaming service is set to announce its first-quarter results on Thursday afternoon; however, with the market closed on Friday, investors will have to wait until the following Monday to see the market’s reaction.
Providing the market an extended holiday weekend to consider a significant release is not problematic. Investing is likened to a slow-cooking process rather than a rapid one. This situation, however, raises the question of whether this additional time might motivate Netflix to consider an action it hasn’t taken in nearly a decade: a stock split.
### Considering the Numbers
Netflix approaches stock splits with deliberation. In its nearly 23 years of public trading, the company has executed only two stock splits: a 2-for-1 split in February 2004 and a more ambitious 7-for-1 split in summer 2015. Currently, Netflix shares are trading much higher than during previous splits. Although the urgency to maintain a stock at a manageable double-digit price is less prevalent today, there are still compelling reasons for Netflix to contemplate a stock split.
1. The ease of purchasing fractional shares does not prohibit individual investors from investing in Netflix’s costly stock. However, the options market presents a challenge, as contracts involve a round lot of 100 shares, meaning an investor would need nearly $100,000 in Netflix stock to perform a covered call.
2. The trend in recent years for tech giants to use high stock prices as a symbol of prestige has shifted. Over the past five years, three of the four most valuable U.S. companies announced stock splits.
3. While Netflix is not expected to join the Dow 30, its current high price would hinder such an inclusion since the Dow 30 is a price-weighted index. This means that Netflix’s stock fluctuations could disproportionately affect the index compared to its priciest component.
The reasons against a stock split are fewer because there is little necessity to keep the stock price elevated.
### Anticipating Another Strong Report
Last year, Netflix’s stock nearly doubled, with another price rise following a strong report. Although the stock did not reach the $1,000 mark in response to that report, it briefly hit that level a month later without any significant announcements. Currently, the stock remains in the high triple digits, just under 3% away from four figures.
If Netflix anticipates a strong earnings report, the possibility of a stock split might have been considered by the board. Earlier in the year, Netflix predicted a 11% increase in first-quarter revenue to $10.4 billion, with earnings growth at half that rate, expected to be $5.58 per share. This outlook may not initially appear strong, given the stock’s performance since the previous year. However, analysts’ projections exceed Netflix’s targets, estimating a profit of $5.66 per share and $10.5 billion in revenue, based on Netflix’s consistent record of surpassing earnings estimates.
Investors should not base their Netflix investment decisions on the anticipation of a stock split boosting share prices post-earnings release. Netflix will need to deliver a robust report for the price to rise. Nonetheless, it could be an opportune moment for a stock split, perhaps creating an impactful pause in trading before the start of a long weekend. Just as Netflix captivates viewers with binge-worthy content, sometimes it’s the anticipation that keeps audiences engaged.
