Netflix Faces Investor Patience Ahead of Key Earnings Report
Netflix (NASDAQ: NFLX), a company known for releasing entire seasons of shows simultaneously, acknowledges that its viewers prefer not to wait. This dynamic will tested as Netflix prepares to report its first-quarter results on Thursday afternoon. With the stock market closed on Friday, investors will experience a four-day wait before seeing the market’s reaction on Monday morning.
Granting the market an extended trading holiday to analyze a revealing report isn’t an issue. Investing should be more akin to a slow-cooked meal than a quick microwave fix. Thus, one might wonder if this extra time could lead Netflix to make a rare announcement: its first stock split in nearly a decade.
Understanding Netflix’s Approach to Stock Splits
Netflix approaches stock splits with serious consideration. After almost 23 years of being publicly traded, the company has executed just two stock splits. The first was a 2-for-1 split in February 2004, shortly after the company’s debut, and a more substantial 7-for-1 split followed in mid-2015.
Currently, Netflix shares are significantly higher than at the time of its previous splits. The current context differs as well; there is less pressure today to keep stock prices in an accessible range. Nonetheless, a stock split could be beneficial for Netflix. Here are several reasons supporting this notion:
- The ability to purchase fractional shares means individual investors can buy into Netflix despite its almost $1,000 share price. However, the high cost in the options market creates a hurdle as option contracts typically represent 100 shares, meaning an investment of nearly $100,000 is required for a single covered call.
- In the past, rising share prices were a badge of honor for tech giants, but this trend has shifted. Recently, three of the four most valuable companies in the U.S. have announced stock splits.
- While unlikely to join the Dow 30 soon, the current high share price hampers its inclusion. The Dow is a price-weighted index, meaning movements in Netflix’s price would affect the index much more than other components. Netflix’s volatility would be nearly five times greater than that of its highest-priced peer.
Comparatively, the reasons against a split are limited, primarily because there is no compelling reason to keep the stock price elevated.
Image source: Getty Images.
Potential Impact of a Split Following Earnings Report
Last year, Netflix shares nearly doubled. Following a strong earnings report last quarter, the stock advanced once again, briefly surpassing the $1,000 mark a month later during a quiet period with no significant announcements. Currently, shares are less than 3% away from that threshold.
If the Netflix board feels optimistic about the upcoming report, it would be unexpected if a stock split hasn’t been discussed. In January, the company projected an 11% revenue increase for the first quarter, estimating $10.4 billion, with earnings expected to rise to $5.58 per share.
Though this projection may seem modest considering Netflix’s notable stock surge, analysts have set their expectations higher. Currently, they predict earnings of $5.66 per share and revenue of $10.5 billion. While this forecast is ambitious, Netflix has exceeded earnings estimates in each of the past four quarters, suggesting momentum is on its side.
Investors should remain cautious and not buy Netflix shares solely on the hope that a stock split will drive prices higher. For the stock to gain ground, it must perform well in its upcoming financial report. However, this moment may be ideal for a split announcement, creating a significant impact as the market prepares to close for an extended break. Just as audiences love binge-watching, they also thrive on anticipation.
Considerations Before Investing in Netflix
Before purchasing Netflix shares, it’s essential to consider the following:
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Rick Munarriz has positions in Netflix. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
