Netflix (NFLX 1.87%) is on the clock. The company behind the world's leading premium video streaming service reports its fourth-quarter results on Tuesday afternoon, the first trading day of the holiday-abridged market week. Expectations are high, but so is Netflix's share price.
Netflix stock soared 83% in 2024, hitting a new all-time last month. Netflix is now a 17% gain away from crossing the $1,000 mile marker. A strong financial update this week could make that happen. If not, a couple of analysts believe that the shares will be trading in four figures later this year. It wouldn't be a surprise if Netflix goes ahead and announces a stock split after Tuesday's market close if its report is even somewhat decent.
Splitting the bill
Expectations are high for Netflix and its fresh financials. Its guidance in mid-October called for a 15% revenue increase for the fourth quarter, in line with the 15% year-over-year jump it posted in the third quarter. The news should be even better on the other end of the income statement. Operating margin, the only metric other than revenue that Netflix provides as guidance, is expected to clock in at 22%. That's 510 basis points ahead of the 16.9% operating margin it posted in the prior year's fourth quarter.
Analysts see revenue rising 14% to $10.1 billion in Tuesday's report, just shy of Netflix's own guidance. They're also expecting profitability to nearly double to $4.20 a share. That's a big bottom-line move for a company that has landed ahead of Wall Street profit targets in each of the past three quarters.
Why should Netflix declare a split if it cranks out another strong quarter? Let's start with the optics. Netflix is a consumer-facing company selling a reasonably priced monthly subscription service. Does it really want to publicize how successful it's been as a business through a gargantuan stock price? I'm not suggesting that many, or even any, of the platform's 283 million paid subscribers will drop the service because of a high stock price, but it can't help the next time the company pushes out a price increase. There are no bragging rights in joining the 18 U.S.-listed stocks currently trading with market caps above $1,000.
Image source: Getty Images.
A stock split also makes financial sense. The transaction itself is a zero-sum game. If you own 100 shares at $1,000, and it becomes 1,000 shares at $100, your ownership remains the same. With the ease of buying fractional shares, a high price shouldn't keep even small investors away. However, a high share price does limit options trading to largely affluent investors. I don't think Netflix wants to do that.
Netflix has split its stock only twice, but both times the shares were trading at much lower price points. It's due for a split since its 7-for-1 transaction nearly 10 years ago in the summer of 2015. At the very least, it sends the bullish signal that Netflix believes the shares can continue to rise from the refreshed starting line. Besides, there's no longer a competition among the market's biggest stocks to see who has the chunkiest price tag.
Netflix is on a roll. Even with Netflix itself modeling for revenue growth to decelerate to the 11% to 13% clip in 2025, that's still back-to-back years of double-digit revenue growth following a couple of years of single-digit increases. Analysts see earnings per share rising 20% this new year.
The ingredients are in mostly in place for Netflix to announces a stock split. Now it needs a blowout quarter. No pressure, Netflix. No pressure.
