Rumor became reality yesterday for Netflix (NFLX) as the company’s board approved a head-turning 7-for-1 stock split.
The nitty gritty details: Stock owners of record at the July 2 close will be rewarded with six more shares of Netflix stock, and trading at the new, “cheaper,” post-split price will begin in mid-July.
While stock splits are common, 7-for-1 stock splits are a bit more rare. This Netflix news sounds a little less outlandish, though, after Apple (AAPL) made headlines for slices its pie a similar way last year.
At the time of the announcement, Apple stock was trading at just under $600. Since the split, shares have gained more than 30% and now fetch around $130. Right now, Netflix stock is approaching $700 after doubling during the year-to-date period alone, so a split will put its pricetag in the same general neighborhood — one that’s argued to be make shares more accessible to the average investor.
While Apple stock’s success post-split could be construed as proof that a lower nominal price can indeed translate to larger gains, there’s hardly a straight line between the split and the upwards momentum. This relationship (or lackthereof) is especially important to consider since Apple stock and Netflix stock sport some stark differences, despite their similarly styled (similar mouth-watering) stock charts and stock splits.
The biggest difference: Netflix is a growth stock, while Apple has already matured to a value stock.
Put another way, Netflix stock is downright expensive regardless of its nominal price.
Fundamental metrics to this end are laughable: Shares of Netflix stock have a PEG ratio (21) that dwarfs the P/E ratio of many tech rivals. But Netflix stock has laughed at fundamentals for some time, and growth investors have been laughing all the way to the bank.
With that in mind, the stock split could indeed help spur shares of Netflix stock to even higher lifetime highs in the short term if investors either a) are hungry to get in after watching the recent climb and find the lower nominal price more appetizing or b) see the split as a vote of confidence from the company.
NFLX Stock Won’t Soar Forever
But no matter how you slice it, it’s more likely than not that Netflix stock will eventually have to come back down to earth. Amazon (AMZN) comes to mind as the best comparison for the kind of la-la land valuation that Netflix currently sports — a land where potential is paramount and profits are afterthoughts. And even AMZN had a painful year or so where investors got sick of unfulfilled promises (although they’re drinking the Kool-Aid again).
Put in that context, it’s important to consider that the stock split could actually be a sign that Netflix may not be able to organically cook up the kind of growth it needs to keep investors happy any more. This precise concern was tossed out when Apple stock announced its stock split, and the company’s valuation (read: growth expectations) wasn’t nearly as absurd as Netflix’s.
There’s a big full-year earnings drop on tap for Netflix — although investors are of course well aware of that fact. And the upside to that downside is a low bar that should allow for annualized growth of more than 23% per year over the next half-decade.
But psychology often wins in the market. Between the headlines, herd mentality, exponential recent gains and a lower nominal price, this news may very well pour some extra gasoline on an already-flaming run … at least in the short term. A cheaper price could be just the financial engineering needed to keep NFLX stock chugging to even higher highs for longer.
Just remember that those higher highs can also mean a more painful drop.
The bottom line: A lower nominal price doesn’t make Netflix stock any cheaper — and while the stock split might be a catalyst for some more outperformance, the highflying stock comes with its fair share of risk.
Alyssa Oursler is based in San Francisco and writes about technology, investing, gender and entrepreneurship. Her work has appeared on Business Insider, MSN Money and more. You can follow her on Twitter here or check out her personal site here. As of this writing, she did not hold a position in any of the aforementioned securities.
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