Netflix Stock Split: Risks Awaiting Investors

Netflix Inc (NASDAQ:NFLX) recently announced a 10-for-1 stock split, and the trading week following the split will begin next week. As most investors know, a stock split does not change the fundamental value of the company; the stock price is adjusted proportionally. However, this will make the shares and options more accessible to retail investors.

With the current price of the NFLX stock being over $1,000, we are curious if the lower price will draw the stock up. This week, I will examine historical data on how stocks have performed after splits. I will evaluate whether the behavior of high-priced, large-cap stocks like NFLX is different.

Using a list containing data on over 310 stock splits since 2010, I present a table summarizing the stock performances following these splits below. For comparison, the returns of the S&P 500 Index (SPX) are also provided alongside the table. Stocks have slightly underperformed in the very short term after a split. The average return of these stocks in the two weeks following the split was 0.48%, while the figure for the SPX was 0.60%. However, the long-term averages show that, although they slightly exceed SPX returns, only about half of the shareholders beat the index, and this higher average return comes with increased volatility.

With Netflix’s stock becoming more affordably priced, I questioned whether the dramatic price drop would make the shares more attractive for investors and yield better returns after the split. For this, I examined the returns of stocks priced above $400. The table below shows the results I obtained.

I was somewhat surprised to see that among the 32 stocks priced above $400 previously, these stocks underperformed in the short term, particularly during the first two weeks. After the split, these stocks averaged a 1.2% loss in the first two weeks, and only 38% managed to outperform the SPX. The underperformance can last for about a month; however, in the longer term (six months to a year), the returns typically leave the broader market behind.

Buying these high-priced stocks immediately after the split has delivered an average return of 17.4% over a year; this figure is 9.8% for the SPX. These stocks have high returns with positive yields from only 50% of them, but they are impacted by certain outliers. For example, when MicroStrategy (MSTR) split in 2024, it nearly tripled in the following 12 months.

Netflix has a market capitalization of about $480 billion, making it a mega-cap stock. Stock splits of such large companies attract more media attention and make the split more visible to retail investors. I was curious about how this might change the behavior after the split. The table below summarizes the returns of stocks with at least a $50 billion market cap following their splits.

Examining the splits meeting this parameter, it has been observed that there is underperformance in the short term. In the first three months following the split, stocks with a market cap of over $50 billion experienced an average loss of 0.3%, with 50% of returns being positive and only 40% outperforming the SPX.

In the subsequent year, however, stocks averaged an 11% return, which is in line with the broader market. Yet among these stocks, only 54% of returns were positive, whereas the SPX had an 81% positive rate. As the visibility of large-cap stocks increases, it is likely that these stocks could experience demand leading up to the announcement date, causing them to be valued until the split date and subsequently lead to underperformance.

Finally, using both filters simultaneously, I examined the historical results of large-cap stocks priced over $400 before the split (at least $50 billion market cap). Next week, NFLX is exactly in this situation. According to my list, there are 20 stocks meeting these parameters, and they closed with an average loss of 2.82% over the next three months; only 35% managed to outperform the SPX. Instead, buying the SPX would have yielded an average return of 3% over three months. Over the next six months, the average return of these stocks was limited to just 1.78%, with only 42% of them being positive, and 37% surpassing the SPX.

You will hear comments about the Netflix stock becoming more accessible for retail investors. However, the data shows that stock splits for large-cap, high-priced stocks tend to lead to weak performance in the following months.