Understanding Stock Splits: What Investors Should Know
When a company announces a stock split, it often signals management’s confidence in its future performance. While a split doesn’t alter the underlying fundamentals of the business, it makes the stock price more accessible for various financial activities, including stock-based compensation and options trading. This can create a buzz among investors, especially those committed to a buy-and-hold strategy, potentially leading to further price appreciation post-announcement.
The Strategic Advantage of Identifying Stock-Split Candidates
For savvy investors, identifying potential stock-split candidates can be a lucrative strategy. Buying shares before the announcement allows investors to capitalize on the increased interest surrounding such news. However, it’s crucial to ensure that the company is on solid financial ground, as a stock split should ideally occur in a context of healthy growth, regardless of the split itself.
Considerations for Meta Platforms and Netflix
Take, for instance, Meta Platforms (NASDAQ: META) and Netflix (NASDAQ: NFLX), which have both seen eye-popping increases of 390% and 300%, respectively, since the market’s low point on October 12, 2022. Currently trading at relatively nominal prices, both are potential candidates for splits in 2025, making them worth watching as Wall Street analysts continue to see significant upside potential in these stocks.
Meta: A Case Study in Efficient Growth
Meta’s recent performance can be attributed to a clear strategic focus from management. CEO Mark Zuckerberg announced 2023 as the "year of efficiency," targeting reductions in operating expenses while concentrating on initiatives that directly influence growth. This focus has resulted in a remarkable 62% increase in operating earnings during 2023, with a similar 52% growth through the first nine months of 2024—even amid heightened investments in artificial intelligence.
Artificial intelligence forms the backbone of Meta’s business strategy. By utilizing advanced machine learning algorithms, Meta tailors content delivery for its users, enhancing engagement and driving advertising conversions. Noteworthy advancements in large language models have allowed the company to significantly revamp its recommendation engine, resulting in impressive user engagement metrics.
The frontier of generative AI presents myriad opportunities for Meta, from increasing user-generated content to fostering business-to-customer interactions across its messaging platforms. Zuckerberg envisions a future where businesses can simply specify their advertising goals and budgets, while Meta’s AI handles the execution—an innovation that could redefine advertising on the platform.
Currently, Meta’s stock trades around $620, and a potential stock split could align its nominal price with other big tech stocks that have undergone splits in recent years. With Wall Street analysts rating the stock and projecting a median target of around $660 per share—a modest 6% upside—many see the current price as a compelling entry point, especially when compared against the backdrop of projected earnings hovering at under 25 times analysts’ 2025 expectations.
Netflix: Embracing Transformational Change
Netflix, too, is a company that has embraced change, enhancing its growth trajectory with two significant strategic shifts over the past two years. The introduction of an ad-supported tier late in 2022 has attracted approximately 70 million viewers, revitalizing subscriber growth by 27%. This innovative move also opens new avenues for content creation, including live events and sporting broadcasts, positioning Netflix as an attractive partner for marketers.
Moreover, Netflix’s decision to crack down on password sharing has begun to yield positive financial results. Although this initiative may have had transient effects on viewership, it has set the stage for robust revenue adjustments as the company focuses on its monetization strategies. International markets still present opportunities for subscriber growth, while existing markets are likely to see enhanced revenue per membership as Netflix capitalizes on its advertising offerings.
Presently, Netflix shares are trading at about $920—a sizable leap since its last split in 2015 when shares were around $700. The recent bullish trend has analysts optimistic; JPMorgan, for instance, has set a price target of $1,010, suggesting nearly 10% upside potential in the coming year. Although now trading at a 46 times forward earnings ratio, Netflix’s operational leverage means strong earnings growth could be sustainable for years as the revenue landscape continues to shift.
Final Thoughts: The Current Investment Landscape
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