1 Stock-Split Stock to Buy Before It Soars 22%, According to Wall Street
The stock is still up more than 20% year to date, but the recent dip offers an attractive buying opportunity.
Netflix (NFLX +0.60%) had a busy past few weeks. The company reported its third-quarter earnings, which disappointed investors and led to a massive sell-off. However, Netflix then announced it would conduct a 10-for-1 stock split, which jolted the stock, though it didn’t recoup all those post-earnings market losses. Amid all this, analysts on Wall Street remain bullish on the stock. The company’s current price target of $1,347.32 implies an upside of 22.3% from its current levels.
Can Netflix match this target within the next year? Let’s find out.
Image source: Getty Images.
What went wrong with Netflix’s quarterly report?
The market set high expectations for Netflix ahead of its third-quarter earnings report. The company has been trading at high multiples through most of the year (and longer). In fact, the streaming specialist still has a forward price-to-earnings ratio of 37, much higher than the 22.3 average for communication services stocks. Netflix’s shares were bound to fall off a cliff post-earnings if there was any hiccup in its quarterly update. Turns out, there was.
The company reported a tax dispute with Brazilian authorities that cost it an additional $619 million in expenses during the quarter. The result: Netflix’s bottom line fell short of expectations. That’s what led to the sell-off. The bears could point out that, since Netflix’s shares remain expensive by traditional valuation metrics, there could be even more downside, and the stock certainly isn’t likely to gain 20% in the next year, as Wall Street predicts. Let’s see whether that’s the case.
Can the split provide momentum?
Stock splits don’t change a company’s underlying business or prospects. However, the market often responds well when major corporations resort to this move. There are likely several reasons why. Let’s consider two of them. First, it makes a whole share of a company more accessible to average people. Netflix’s current stock price is about $1,100. Many may not have the cash to buy a share at current levels. True, fractional shares are available on many online brokers’ platforms. Even so, after its stock split, Netflix’s stock will trade at about $110 apiece, based on its current price, which looks much cheaper even if it isn’t, considering how stock splits work.
Today’s Change
(0.60%) $6.64
Current Price
$1103.66
Key Data Points
Market Cap
$468B
Day’s Range
$1087.50 – $1108.22
52wk Range
$795.57 – $1341.15
Volume
4.4M
Avg Vol
3.5M
Gross Margin
48.02%
Dividend Yield
N/A
Second, stock splits may signal management’s confidence in the business. If Netflix’s leadership team expects the stock to soar from its current (already expensive) levels, a stock split makes even more sense. That said, investors should focus on Netflix’s underlying business. Whatever temporary boost the announced stock split provides, it will be just that, temporary, unless Netflix has other growth catalysts that allow it to perform well over the next 12 months.
Why Netflix stock is still a buy
Netflix’s business remains incredibly strong. The tax dispute with Brazilian authorities won’t have a meaningful impact on its results moving forward. That was the only blemish in an otherwise excellent quarterly update. Netflix’s revenue for the period came in at $11.5 billion, 17.2% higher than the year-ago period. The company continues to record strong free cash flow, which came in at $2.66 billion, 21.2% higher than the prior-year quarter.
Netflix is still the king of streaming and continues to thrive despite mounting competition. And one factor driving revenue growth should improve meaningfully in the next year: ads. Netflix’s ad business is still pretty new, but the company is making progress. Though it did not disclose specific dollar amounts, Netflix said the third quarter was its best ever for ad sales. And the company is still showing strong momentum here, since it doubled its upfront ad commitment in the U.S.
Netflix’s ad business still accounts for a relatively small percentage of its total sales, but it can help boost sales as it scales. As the company sees plenty of growth ahead in that department, we could see that over the next few quarters, along with continued membership growth. Netflix has earned its premium and, even at current levels, looks like an attractive long-term buy for investors. Can the stock gain 20% in the next 12 months? In my view, there is a reasonable chance of that happening.
However, even if it doesn’t, it will pay to stay the course and hold the stock through the next five years and beyond.