The Netflix Stock Split Is Here. Are Shares Still a Buy?
Shares will start trading on a split-adjusted basis on Nov. 17.
Revenue growth has accelerated in recent quarters.
One key valuation metric puts the stock’s valuation into perspective.
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Since it last split its stock back in 2015, shares of Netflix(NASDAQ: NFLX) have surged on the back of incredible business growth and increased confidence in the company’s long-term investment thesis. This investor optimism has made the stock a Wall Street darling, putting shares well beyond $1,000 — a level that makes a stock split sensible. To this end, the company recently announced it is splitting its stock 10-for-1.
The streaming service company says the split is about accessibility, especially for employees who participate in the company’s stock option program. Still, it’s a seminal moment for the stock and shareholders — especially considering the roller coaster shareholders have been on in recent years. Capturing the stock’s wild volatility during this period, shares traded at levels below $200 as recently as 2022 — a far cry from today’s levels.
With shares set to begin trading on a split-adjusted basis tomorrow, it’s a good time to look at the stock. Is it a buy, even after the split?
Image source: Netflix.
Driven by a combination of price hikes, membership growth, and increased advertising revenue, Netflix’s third-quarter revenue rose 17.2% year over year — an uptick from 15.9% growth in the second quarter and above the company’s 15.7% top-line growth in 2024. Management also guided to another 17% increase for the fourth quarter, which implies the reacceleration is holding into year’s end.
Key to the company’s growth story is its advertising business. While this part of Netflix’s operation is less than three years old and is still small relative to its subscription business, it is scaling fast.
“We have a solid foundation and are increasingly confident in the outlook for our ads business,” management said in the company’s third-quarter update. “We are now on track to more than double our ads revenue in 2025…”
That matters because ads can widen Netflix’s growth runway without relying solely on new subscribers and price hikes. And because advertising economics can be attractive, the fast-growing business will likely bolster profits meaningfully over time.
Even before the advertising business becomes a substantial portion of overall revenue, Netflix’s core business is already driving operating margin expansion. The company’s 2024 operating margin was 27%, up from 16% in 2023. And management expects its 2025 operating margin to expand to 29%.
Notably, the stock split doesn’t change the business or the company’s value. It just gives Netflix investors 10 shares with a total value of what one share was worth before the split. Investors, therefore, shouldn’t buy the stock because of the split; it’s just a matter of optics.
Still, given the stock’s big run-up over the last few years, it’s a good time to look at the stock. Clearly, the business is firing on all cylinders. But are shares priced attractively?
As of this writing, Netflix trades at a price-to-earnings ratio of more than 47. While this may seem stretched, investors should remember that the company’s double-digit revenue growth and operating margin is expected to drive significant earnings growth over the next year. For this reason, the company’s price-to-forward earnings ratio may be a more effective way to understand the stock’s valuation in the proper context. Netflix’s forward P/E ratio sits at 35 — a much more reasonable (and even attractive) figure in light of the company’s market leadership and recent growth trends. And don’t forget about Netflix’s fast-growing advertising business, which could morph into a major earnings growth lever over the next five to 10 years.
So, is Netflix stock a buy — even after a stock split? I think so. Of course, no stock is without risks. The competition in the space is intense, featuring deep-pocketed tech companies with massive funds available for content spending. For this reason, I’d keep any position in the stock small. Additionally, investors who decide to buy shares should keep a watchful eye on the competitive nature of the streaming business to see if any future developments change the investment thesis.
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Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix. The Motley Fool has a disclosure policy.
The Netflix Stock Split Is Here. Are Shares Still a Buy? was originally published by The Motley Fool
