Netflix Stock Split: Will there be a split in 2023?
Netflix stock was once the top investment pick in the entertainment industry. The stock had a dream bull run for a decade from 2011 to 2021. The share price rose by more than 2500% in these 10 years. The stock formed an all-time high of $682.61 on 12 November 2021 and a major downtrend started from there on the backdrop of higher interest rates and inflation fears across the globe. The price fell 72% from its peak in less than six months. While major tech companies like Alphabet, Tesla, and Amazon restored to forward stock split to attract investors, Netflix has not announced any plan.
In this article, we will analyze the past split and look around for the possibility of a stock split in the near future.
Netflix Stock Split History
Netflix came up with an IPO in May 2002. Since then, the company has split its shares twice, first in 2004 and then in 2015. The first split in 2004 was in the ratio of 2:1. Netflix did not announce any stock split for the next 11 years. It was only in 2015 when the share price touched $700, that management called for a 7:1 stock split. In 2015, Netflix shares closed at $681.17 pre-split on the day of the announcement. The move was specially meant to make the shares affordable to small investors as it brought down the price to around $100.
As a result of the split, each shareholder received one extra share in 2004 and six additional shares in 2015. The share price has again run up post-2015 split from $100 to $700 in November 2021 but there was no indication of an upcoming stock split from Netflix management.
Will Netflix Split the Stock in 2023?
2022 has been one of the worst years for Netflix and the share price fell by more than 50% in the year. After making a low of $174 on 12th July 2022, the price has recovered 141% to above $300. The important question is will the management announce a stock split in 2023? There are a few factors to consider for the stock split.
- Requirement for the increase in authorized shares outstanding- The best clue for coming up stock split is the voting for the increase in the number of authorized shares outstanding. For example, in the year 2015, Netflix requested an increase in share count from shareholders to carry out a 7:1 stock split, as the previous number of shares was insufficient to carry out the split. But, at present, the shares authorized are nearly five billion and the shares outstanding are only 442 million. In short, Netflix can carry 10 for 1 stock split also, without taking any approval. In all practical scenarios, the company will not carry out a bigger split than that.
- Compensation to the employees – A better motive for Netflix Inc. to split the stock would be to make share options more accessible to the employees. Netflix employees pay 40% of the face value for at-the-money options with a 10-year expiry period. It is a very good strategy for motivating employees and Netflix must keep the share price lower to exercise this option more effectively. Netflix employees do not get fractional options and as per the current share price, each option costs around $200 which is seemingly unaffordable for junior-level employees. A stock split will make the share affordable to retail investors and will also make Netflix options more affordable to the employees.
Is Netflix a Buy Now
As with other stocks, there are pros and cons to Netflix Inc. stock. While it was a disruptor of the entertainment industry a decade back, many things have evolved over the decade with fierce competition building up every year since the Pandemic of 2020.
The biggest disadvantage of Netflix as a stock is the company’s accounting practices. The company accounts for the expenses it incurs for content over a period of time (for most TV shows and movies, it is four years). This leads to inflated net income figures and EPS valuation metrics. But, as a result of expenses, actual cash outflow occurs immediately and there is a disconnect between net income and free cash flow, but the latter is more accurate to gauge Netflix. Management expects a revenue jump of only 1% in the recent quarter and the EPS outlook is also 0.36, significantly down from $1.33 in the same quarter last year.
While not everything is bad with Netflix. It recently received a double analyst upgrade. Analysts believe that Netflix has a scalable moat that will be difficult for rivals to cross. The recently introduced ad-supported tier and a crackdown on account sharing should keep subscriber counts growing in the near future. Ad-supported tier allows customers to pay 30% less and is much more attractive for families looking to reduce their subscription expenses.
It also needs to be pointed out that all Netflix competitors are losing money in streaming services. For example, Disney’s streaming service reported an operating loss of $4 billion over the past 12 months. In contrast, Netflix booked operating profits of $5.7 billion in the same period. Also, Disney is generating substantially less revenue than Netflix. Well-established Hulu also generates only 75% of the revenue per user as compared to Netflix’s U.S. subscribers. But Netflix does not have a vertically integrated model that Disney has and there are no different entertainment outlets like theme parks.
Will Netflix Stock Split Impact Netflix Price?
Netflix shares received shockwaves in April 2022, when they reported a loss of 200,000 members in the first quarter. That single news pulled the shares down 68% from January to April. It further reported the same figure in the second quarter and a modest decline of 1 million in the third quarter.
All this news along with the macroeconomic environment has led to a 50% decline in the share price in 2022. But things are likely to change in 2023. The introduction of an ad-supported tier should solve the problem of subscriber loss.
Netflix should look for catalysts for a short bull run in the stock and a share split can be one of the most effective means. Having split the shares only twice in the last 18 years, management can think about executing a forward stock split not only for investors but for employees too.