Netflix is a very interesting stock. It's got one of the highest valuations in the market compared to earnings and still does incredibly well. So well in fact that the company decided to go through a stock split in order to make their shares more obtainable for the average investor. Today, we'll talk about what a stock split is, how things worked with the Netflix stock split, how investors reacted, and what we can expect to see from NFLX moving forward. So, let's get right to it…
What Is A Stock Split
A stock split is a strategic move made by publicly traded corporations in an attempt to make their stock more accessible to the average investor when prices get too high. To do so, new shares are issued at a lower price by splitting the current shares available. For example, let's say that a company is trading at $330 per share. To make the stock mare accessible to the average investor, the company could perform a 3 to 1 stock split; issuing 2 new shares of every outstanding share and splitting the price by three. Effectively, this would bring the value of each share down to $110; ultimately making it more affordable.
The Details Of The Netflix Stock Split
Netflix shares grew to be very expensive; over $700 per share at one point. As a result, the company decided to do a 7 to 1 stock split. So, for every one share an investor owned of the stock, they now own 7 shares with a lower value. This brought the current value of Netflix shares down to just below $100 per share. The big question is, “Will this be enough to drive growth in NFLX?”.
In My Opinion, The Answer Is No
First off, we can look into the stock in the market today and see that the split hasn't put an end to declines; and in the long run, I don't think we're going to see anything different. Although we've seen massive gains recently, I think those gains are going to turn to declines very soon. There are two reasons for this…
The Stock Is Far Overvalued – At it's current valuation, Netflix stock is selling for 226 times earnings expectations for the year 2016. Considering that overall valuations around 17 times earnings on average are scaring investors, it's hard to imagine that Netflix could climb much further from here.
Earnings Are On The Way – This earnings season is expected to be negative overall; and with Netflix trading at such an extremely high valuation, they can't miss expectations. If the company produces earnings that are below investor expectations, we can expect to see massive declines.
So, it all boils down to earnings. If earnings are positive, I'm expecting to see relatively sideways movement. However, if earnings are negative, I'm expecting to see major declines.
How To Trade Netflix
When it comes to Netflix, I think we're gearing up for downtrends. So, the best way to trade would be to look for points of resistance in the market. When the stock meets resistance, purchase puts and profit from the downtrends.
What Do You Think?
Where do you think Netflix is headed and why? Let us know in the comments below!