Netflix’s 7-for-1 stock split will probably boost the price of the stock.
And this makes literally no sense.
On Tuesday evening, Netflix announced that shareholders on July 14 will get 7 shares of the company for every 1 share of the company they owned as of July 2. As a result, whatever the price of Netflix shares is on that date will be divided by 7.
On Tuesday, shares of Netflix were trading right around $US700 a share, so in about 3 weeks, Netflix shares will be trading at around $US100.
Following the news of the Netflix stock split, shares were up about 2.5% in pre-market trade on Tuesday.
Which is insane.
What happens when a company split its stock is that price of a single share falls, but the value of the company doesn’t change at all.
The company’s price-to-earnings multiple (basically a measure of how many dollars investors pay for $US1 of earnings) and other valuation measures don’t change at all, the only thing that changes is how many shares exist in the market and how much you have to pay for one of them.
And so it is crazy that stock splits make share prices go up. But this is exactly what analysts at Bank of America Merrill Lynch think will happen to Netflix.
In a note on Wednesday, BAML writes:
Stock splits have no real impact to intrinsic value of the company, but we believe this split could benefit shares as the lower purchase price would make the stock more accessible to investors in smaller increments.
Basically BAML is admitting that investors are fools.
Anyone who buys a share of Netflix simply because it costs less is not a serious investor, or is not doing their homework and is taking the exact opposite approach that you are best-served by when thinking about investing in stocks.
The price — the amount a stock is worth — is NEVER a reason to buy or not buy a stock. The reason to buy or not buy (or sell!) a stock is because of what you think the company is worth, meaning how much a company makes in profit, or what you think it could make in the future, and so on.
Of course, the latter analysis — value not price — will have an impact on the price of a stock because, well, maths. But this does not mean that the price of a stock itself is a reason to buy or sell.
And so all of the future Netflix shareholders who are excited to buy a $US100 stock instead of a $US700 stock should be excited not about buying a $US100 stock, but about a company that has more than 60 million streaming subscribers and had net income of $US23.7 million in its most recent quarter.
Otherwise, you should do something else with your money.