Netflix’s Recent Stock Split and Strategic Moves
Netflix recently completed its first stock split in over a decade, marking a significant milestone for the company. As the leading provider of subscription streaming video services, Netflix has consistently driven revenue and profit growth over the years. Despite the recent announcement of its plan to acquire Warner Bros. Discovery, many investors still view Netflix as a strong buy.
The S&P 500 is one of the most respected stock market indices in the U.S., consisting of the 500 largest publicly traded companies. Investors often consider it a reliable indicator of overall market performance due to the diversity of its member companies. To be included in the S&P 500, a company must meet several criteria:
- Be based in the U.S.
- Have a market cap of at least $22.7 billion
- Be highly liquid
- At least 50% of its outstanding shares must be available for trading
- Must be profitable on a GAAP basis in the most recent quarter
- Must be profitable over the preceding four quarters
Netflix first joined the S&P 500 in December 2010, but it recently completed a 10-for-1 forward stock split. This move typically occurs after a company achieves strong business and financial results, which has been the case for Netflix. Since its 2002 IPO, the stock has surged an impressive 80,730% (as of this writing), and Netflix continues to lead the streaming industry it pioneered.
Despite its impressive performance, Wall Street believes the company still has a long runway ahead, whether or not it proceeds with its recent acquisition of Warner Bros. Discovery.
The Hits Just Keep Coming
Netflix’s history of providing in-home entertainment dates back more than two decades. The company launched its “Watch Now” streaming service in 2007 as an added value for its subscribers, but always had a vision of being an internet-based movie delivery service — hence the name. Netflix gradually expanded its streaming service across select countries before going global in 2016.
Although shifting away from its successful DVD-by-mail business was a risky move, it proved prescient. Broadcast and cable television viewing, as well as movie theater attendance, are in secular decline, while streaming services have become accessible worldwide.
In the third quarter, Netflix generated revenue that increased by 17% year-over-year to $11.5 billion, driving its adjusted earnings per share (EPS) up by 27% to $6.87. Management expects this growth streak to continue, with fourth-quarter revenue projected to reach $11.96 billion, resulting in EPS of $5.45, a 28% increase.
The Warner Bros. Discovery Wildcard
Even though Netflix’s stock split was completed in November, recent events have overshadowed this development. Late last week, Netflix announced plans to acquire certain assets from Warner Bros. Discovery in a deal valued at $82.7 billion, or $27.75 per share. The agreement includes the Warner Bros. film and television studios and its HBO and HBO Max streaming services. While the deal was unanimously approved by both companies’ boards, it still requires regulatory approval.
On the heels of this deal, Paramount Skydance announced a hostile takeover bid for Warner Bros. Discovery, offering $30 per share directly to shareholders. It remains uncertain whether this bid will succeed.
At an investor conference on Monday, Netflix’s co-CEO Ted Sarandos expressed confidence, stating, “Today’s move [by Paramount] was entirely expected. We have a deal done, and we are incredibly happy with the deal. We think it’s great for our shareholders. It’s great for consumers.”
Assuming the deal goes through, Netflix has a plan to maximize the benefits of the acquisition. Co-CEO Greg Peters mentioned that the company will use licensing to extract more value from Warner Bros. titles and create bundling opportunities with HBO and HBO Max.
Netflix has access to a treasure trove of data spanning decades, which it used to evaluate Warner Bros.’ assets. The company’s sophisticated recommendation algorithm provides detailed insights into viewer preferences. Combined with Warner Bros.’ vast content library, this represents a winning combination that Netflix will leverage to drive future growth.
Several analysts have raised concerns about the deal’s price and integration risks due to differing company cultures. However, the majority of Wall Street analysts remain bullish on Netflix. Of the 42 analysts who offered opinions in December, 28 (or 67%) rated the company a buy or strong buy, 13 rated it a hold, and one had an underperform rating. The average price target of $129 represents potential upside of 34% compared to Tuesday’s closing price.
Valuation and Performance
Netflix is currently selling at a premium, trading at 39 times earnings. However, this is cheaper than the stock’s average multiple of 45 over the past three years, making its valuation more attractive by comparison. Given the company’s long track record of execution and leadership in the streaming industry, the premium is justified. Additionally, Netflix stock has outperformed the broader market over the past 10 years, generating gains of 687%, far surpassing the 233% return of the S&P 500.
By that measure, Netflix stock is still a buy.
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