Despite Catapulting to an All-Time High, Netflix Just Missed a Golden Opportunity

For more than two years, the bulls have been an unstoppable force on Wall Street. The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite rose by 13%, 23%, and 29%, respectively, in 2024, with all three indexes notching multiple record-closing highs.

Numerous factors have acted as the fuel propelling the stock market higher, such as the rise of artificial intelligence (AI) and Donald Trump's Election Day victory in November. President Trump's first term in office saw the Dow Jones, S&P 500, and Nasdaq Composite gain 57%, 70%, and 142%, respectively.

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However, credit for this historic rally also goes to the FAANG stocks. The "FAANG" acronym is comprised of:

• Meta Platforms, which was formerly known as Facebook (the "F")
• Apple
• Amazon
• Netflix (NASDAQ: NFLX)
• Alphabet, which was formerly known as Google (the "G")

These are five businesses that have vastly outperformed the return of the benchmark S&P 500 over the trailing-10-year period, and sport a mix of first-mover/sustainable competitive advantages.

Image source: Getty Images.

While all five are worthy of recognition, it's streaming services provider Netflix that's been the wind in the S&P 500's sails early in 2025.

Netflix stock is on the doorstep of $1,000

Following the closing bell on Jan. 21, Netflix lifted the hood on its fourth-quarter operating results and blew Wall Street's socks off. Although its shares briefly topped $1,000 in after-hours trading, Netflix logged an official all-time intra-day high of $999 per share the following day. The company's stock is up nearly 10% for the year, 79% over the trailing year, and is closing in on a 1,500% gain over the trailing decade.

The real eye-popper for Netflix was the company's paid subscriber growth. In just three months, ending Dec. 31, the company added 18.91 million global streaming subscribers. For context, quarterly subscriber growth had come in between roughly 2 million and 13 million since the start of 2023.

A lot of things are clearly working in Netflix's favor. For one, it's relying on its original content and push into live sporting events to attract new members and retain existing subscribers. No streaming service has more original shows than Netflix, with the company's top original content, Squid Game, Wednesday, and Stranger Things, driving viewership.

Netflix has also leaned on its out-of-the-box innovation. In November 2022, the company introduced ad-supported tiers as a way to lure more cost-conscious consumers. In just a tad over two years, it's added 70 million paying ad-tier subscribers. This decisively resolved the slowdown in subscriber growth Netflix experienced in 2022.

To build on the above, Netflix's unpopular but necessary crackdown on password sharing has found the mark. Requiring users to create accounts helped juice subscriber growth and has likely played a key role in rapidly growing its ad-supported tier.

Having first-mover advantages in the streaming space and being decisively profitable for years also affords Netflix exceptional subscription pricing power. Last week, it announced it was increasing the price of its ad-based tier by $1 per month to $7.99, while the ad-free and premium plans are jumping by $2.50 and $2 per month, respectively, to $17.99 and $24.99. Netflix has previously shown that price hikes don't chase away its paid members.

Image source: Getty Images.

Netflix may have just flubbed a no-brainer opportunity

But in spite of a seemingly perfect quarter, Netflix's board of directors may have missed out on a golden opportunity to announce a stock split.

Since going public in May 2002, Netflix's board has approved two forward splits, which are designed to make shares of a publicly traded company more nominally affordable for everyday investors who don't have access to fractional-share purchases through their broker. It effected a 2-for-1 split in February 2004 and its largest-to-date 7-for-1 forward split on July 15, 2015. When Netflix undertook this 7-for-1 split, its shares were trading around $700. As of this writing, each share is worth close to $978.

The interesting quirk about stock-split stocks is that they've historically outperformed the S&P 500 in the 12 months following the announcement. Based on a study by Bank of America Global Research, companies undertaking forward splits have averaged a 25.4% return in the 12 months following their announcements since 1980. The comparable performance for the benchmark S&P 500 is a more modest 11.9% return over 12 months.

Although past performance is no guarantee of future results, a stock split would serve three purposes for Netflix.

For starters, forward stock splits act as a beacon to help investors locate outperforming businesses. If a company's share price has soared to the point where it needs to conduct a split, it's most likely demonstrated to Wall Street that it's out-innovating and out-executing its peers.

Secondly, a stock split would add a retail investor element to Netflix's stock that's arguably lacking. Only 18% of Netflix's shares are owned by non-institutional investors, and its nearly $978 share price is probably why this figure is so low. Making its shares more nominally affordable could entice everyday investors back into its stock.

NFLX data by YCharts. PS Ratio = Price-to-sales ratio.

The third purpose a split would serve for Netflix is to partially mask the company's historically pricey stock. To be fair, the stock market is itself historically pricey. The S&P 500's Shiller price-to-earnings (P/E) Ratio is at its third-highest reading (nearly 39) during a continuous bull market when back-tested 154 years.

However, Netflix is trading at 11 times its trailing-12-month sales following its latest earnings report. The previous times the company's price-to-sales (P/S) ratio reached or eclipsed 11 on a regular basis over the trailing decade, its share price declined by a sizable percentage not long thereafter. Given that stock-split stocks have a history of outperformance in the 12 months following their announcement, investors might be willing to overlook Netflix's premium valuation if it were to unveil a split.

It's possible Netflix's board missed a golden opportunity to put its stock firmly in the spotlight.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Bank of America is an advertising partner of Motley Fool Money. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Sean Williams has positions in Alphabet, Amazon, Bank of America, and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Bank of America, Meta Platforms, and Netflix. The Motley Fool has a disclosure policy.