When the closing bell tolled for 2024, optimists had plenty to smile about. During the course of the year, the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all ascended to multiple record-closing highs.
Catalysts have been abundant, with better-than-expected corporate earnings, Donald Trump’s November victory (stocks rocketed higher during Trump’s first term in the White House), and the artificial intelligence (AI) revolution lighting a fire under equities. But don’t overlook the importance of stock-split euphoria in driving stocks higher over the last year.
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Stock-split euphoria takes hold on Wall Street
A stock split is an event that allows a publicly traded company to cosmetically alter its share price and outstanding share count by the same factor. These changes are cosmetic in the sense that they don’t have an impact on a company’s market cap or its underlying operating performance.
Splits come in two varieties, of which investors favor one considerably more than the other. Reverse splits, which aren’t too popular, involve increasing a company’s share price, often with the goal of ensuring continued listing on a major stock exchange. This type of split is usually completed from a position of operating weakness.
On the other hand, investors flock to companies conducting forward stock splits. A forward split reduces a company’s share price to make it more nominally affordable for everyday investors who lack access to fractional-share purchases through their broker.
Statistically speaking, forward splits have a knack for outperforming. Data from Bank of America Global Research found that companies completing this type of split delivered an average return of 25.4% in the 12 months following their announcement since 1980. In comparison, the S&P 500 averaged a more modest 11.9% annual return during these same timelines.
In 2024, more than a dozen prominent businesses completed a stock split, and all but one was of the forward variety. Considering how well stock-split stocks perform, investors are always on the lookout for the next big announcement.
What follows are two magnificent companies that can kick off 2025 with a bang by making a historic stock split announcement.
Meta Platforms
Though there are more than a dozen publicly traded companies with a share price north of $1,000, many of these businesses have exceptionally high levels of institutional ownership -- and big-money investors don’t require a lower share price to continue investing. This is why I believe social media juggernaut Meta Platforms (META -2.31%), which has just 72% institutional ownership, is the most-logical of all candidates to kick off 2025 with a stock split announcement.
Although Meta’s future is all about AI and the metaverse, it’s important to recognize just how vital the company’s premier social media assets are. Through the first nine months of 2024, 98% of the $116.2 billion in revenue Meta brought in could be traced to advertising.
Meta is the parent of the most-popular social media site Facebook, as well as Instagram, WhatsApp, Threads, and Facebook Messenger. During the September-ended quarter, its family of apps attracted 3.29 billion users to its sites on a daily basis. With no other social media company particularly close to Meta, in terms of daily active users, it’s often easy to sustain premium ad-pricing power.
To add to this point, Meta benefits from the nonlinearity of the economic cycle. In other words, periods of economic expansion tend to last considerably longer than recessions. This means businesses spend far more time expanding their marketing budgets than playing defense during periods of economic turbulence. As the U.S. economy grows over time, so should Meta’s ad revenue.
But this is a company that’s also counting on AI to drive growth. In January 2024, Meta announced plans to purchase 350,000 Hopper (H100) chips from Nvidia for an expected cost of more than $10 billion. These graphics processing units (GPUs) will be used to train Meta’s Llama 3 AI model, build digital assistants, and advance other aspects of its operations, including making advertising more efficient for businesses.
One of the reasons Meta is able to invest so aggressively in these future growth initiatives is its exceptional cash flow and cash-rich balance sheet. Having close to $71 billion in cash, cash equivalents, and marketable securities, and generating an average of more than $21 billion in net operating cash per quarter, allows CEO Mark Zuckerberg to take risks few other companies can attempt.
With Meta stock surpassing $600 per share on numerous occasions over the last six weeks, this looks like an ideal time for the company’s board to announce its first-ever stock split.
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Netflix
The other magnificent company that can kick off 2025 with a historic stock split announcement is none other than FAANG stock Netflix (NFLX -1.42%). The last time Netflix split its stock -- a 7-for-1 forward split on July 15, 2015 -- its shares traded around $700. As of the closing bell on Jan. 14, Netflix stock hit the scales at $828.40, which points to an even larger (i.e., historic) split factor.
Similar to Meta, Netflix has thrived because of its clear-cut competitive advantages. Although it’s far from the only game in town when it comes to streaming services, Netflix is the first streaming stock to demonstrate that direct-to-consumer content can be a profitable operating model. Netflix closed out the September quarter with around 282.7 million global streaming paid memberships.
Aside from being recurringly profitable in a space where even legacy media is spending big bucks and coming up short, Netflix has won over audiences with its original content. No streaming service has come remotely close to the depth of its original shows, which include the likes of Squid Game, Wednesday, and Stranger Things.
Netflix’s international push is paying dividends, as well. Throughout the latter half of the prior decade, Netflix was persistently burning through cash in an effort to expand overseas and grow its content library. But over the last four years, the company’s free cash flow (FCF) has decisively shifted to the positive. It’s generated more than $7.1 billion in FCF over the trailing year, ended Sept. 30.
The company’s out-of-the-box innovation is also working wonders. In November 2022, Netflix launched a less-costly ad-supported streaming tier to counter slower subscriber growth. Less than two years later, this ad-supported tier has reached 70 million global active users. The ability to pull levers and maintain strong subscription pricing power is a recipe for a progressively higher operating margin over time.
Lastly, announcing a high-magnitude forward stock split (think 8-for-1 or 10-for-1) might take some attention away from Netflix’s premium valuation. While a company with sustained competitive advantages should be valued at a premium, Netflix’s multiple of 37 times forward-year cash flow and 35 times forward-year earnings is quite the stretch amid a historically pricey stock market.
