Netflix Stock Split: Risks Awaiting Investors

Netflix Inc (NASDAQ:NFLX) recently announced a 10-for-1 stock split, and trading for 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 move will make the stock and options more accessible for retail investors.

With the NFLX stock currently priced over $1,000, we wonder whether the lower price will pull the stock up. This week, I will examine historical data on how stocks perform following splits. I will evaluate whether high-priced, large-cap stocks like NFLX behave differently.

Using a list containing data from over 310 stock splits since 2010, I present a table summarizing the post-split stock performance below. For comparison, the returns of the S&P 500 Index (SPX) are also provided alongside. Stocks showed slightly lower performance in the very short term following splits. The average return of stocks in the two weeks following the split was 0.48%, compared to 0.60% for the SPX. In the longer term, although the average returns are somewhat above those of the SPX, only half of the stockholders outperform the index, and this higher average return comes with increased volatility.

With Netflix shares becoming more affordably priced, I wondered whether the dramatic price drop would make the stocks more attractive for investors and whether this would lead to better returns post-split. I examined the returns of stocks that were priced above $400. The table below shows the results I obtained.

I was somewhat surprised to see that among the 32 stocks that were previously above $400, they performed poorly in the short term, especially in the first two weeks. After the split, these stocks averaged a 1.2% loss in the first two weeks, with only 38% outperforming the SPX. This underperformance can last about a month; however, in the longer term (six months and one year), the returns tend to outperform the broader market.

Buying these high-priced stocks immediately after the split has yielded an average return of 17.4% over one year; this is compared to 9.8% for the SPX. However, only 50% of the positive performers achieve high returns, and some of these returns are influenced by outliers. For example, when MicroStrategy (MSTR) split in 2024, it nearly tripled in value over the next 12 months.

With a market capitalization of approximately $480 billion, Netflix becomes a mega-cap stock. Stock splits of such large companies attract more media attention and make the splits more visible to retail investors. I again wondered how this could alter post-split behavior. The following table summarizes the returns of stocks with a market capitalization of at least $50 billion after a split.

Examining 40 stock splits that meet this criterion, a pattern of short-term underperformance is observed. In the first three months after the split, stocks with a market capitalization above $50 billion averaged a 0.3% loss, with 50% of the returns being positive and only 40% outperforming the SPX.

In the following year, however, stocks posted an average return of 11%, which aligns with the broader market. Still, only 54% of these stocks have positive returns, compared to an 81% positive rate for the SPX. As the visibility of large-cap stocks increases, these stocks may experience demand leading up to the announcement date; this could lead to them being valued up to the split date and subsequently underperforming.

Finally, I examined historical results using both filters simultaneously, analyzing large-cap stocks priced above $400 (with a market cap of at least $50 billion) before the split. Next week, the situation for NFLX will be exactly this. History increases the likelihood of experiencing post-split underperformance.

In my list, there are 20 stocks that meet this criterion, and these stocks closed with an average loss of 2.82% in the next three months, with only 35% outperforming the SPX. In contrast, buying the SPX would have yielded an average 3% return over three months. In the following six months, the average return of these stocks was limited to just 1.78%, with positive returns at 42% and those outperforming the SPX at 37%.

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