When a company's management decides to split its stock, this usually comes after a strong run-up in the price of its shares. While it won't change any of the underlying fundamentals of investing in the company, the split can signal confidence from management that the price of shares is justified and could continue to climb higher. As a result, many investors see management announcing a stock split as a good reason to buy shares, giving it an additional bump in price.
But if you can invest in stocks before their management announces a stock split, you could be the beneficiary of those excited buyers piling into shares. Of course, a potential stock split isn't a good reason to buy a company's stock in and of itself. Investors should also look for companies that are executing well and should see their stock prices climb, whether management announces a split or not.
Both Meta Platforms(NASDAQ: META) and Netflix(NASDAQ: NFLX) have seen their stock prices climb more than 200% over the last two years, putting them in stock-split territory. Considering the outlook for both businesses, a stock split could certainly make sense in 2025. Here's why they're both worth owning regardless.
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1. Meta Platforms: Up 306% in 2 years
Over the last two years, Meta has significantly ramped up its spending on artificial intelligence (AI). Its capital expenditures in 2023 were $28.1 billion. For 2025, management expects to spend up to $65 billion.
There's good reason for all that spending. Meta is seeing meaningful returns on its capital investments. Income from operations increased 48% last year. That came as the result of higher engagement, more ad impressions, and higher ad prices. All three were driven by artificial intelligence improvements.
AI has a massive potential to affect Meta in 2025 and beyond, too. The company's adding more generative AI capabilities to its tools for marketers, making it easier to create and test new campaigns and find audiences for them. It's working on chatbots for businesses, which at least one Wall Street analyst thinks could be a $100 billion opportunity. It's also developing increasingly advanced tools for marketers, which could enable an AI agent to design and run entire ad campaigns.
AI could also be used to increase engagement on the consumer side, with new tools to help creators make more interesting content. AI could even generate unique content exclusively for its users, something Meta is already experimenting with.
After a strong run up in the share price over the last month, Meta stock now trades for a forward price-to-earnings (P/E) of 28. That's a high price to pay, but the stock price looks more appealing from an enterprise value-to-EBITDA perspective with a multiple of 16.
Importantly, Meta is generating tons of free cash flow, which it uses to buy back shares and support high earnings-per-share growth. That makes it worth a higher-than-average multiple, and it still looks worth the money after the strong run up to over $700 per share. At that price, Meta could be looking to make its first-ever stock split to bring the value of each share down to a more comparable level with most other big tech stocks.
2. Netflix: Up 203% in 2 years
Netflix has made a couple of significant changes over the last two years that helped drive incredible results for the business. It introduced an ad-supported membership tier, giving customers a lower-priced option. After putting the new ad-supported option in place, management started cracking down on password sharing.
The results speak for themselves. Netflix ended 2024 with more than 300 million paid subscribers. That's up from 223 million subscribers the quarter before launching the ad-supported tier in 2022.
At the same time, Netflix has turned into a cash flow machine. After years of burning cash to fund more original content, the company became cash flow positive in 2022, producing $1.6 billion in free cash flow that year. Last year, that grew to $6.9 billion. Management expects $8 billion in free cash flow for 2025. The bulk of that free cash flow goes toward repurchasing shares, and management has a total authorization of $17.1 billion to continue buying back the stock.
There's a lot of potential for Netflix going forward. It implemented another price increase this year, including a price hike for the ad tier. Perhaps the most upside in revenue per account comes from increasing its ad sales. Netflix has increased the amount of live programming on its service, like sports events, which often include natural ad breaks. Combined with increasing its price per ad as it brings its ad technology and sales in house, this should result in steady revenue increases without the need to increase prices for customers as much.
Netflix has seen its stock price soar above $1,000 per share, so a stock split could bring that sticker price down to something everyday investors can comfortably buy. That said, Netflix's stock is incredibly expensive, trading for roughly 41 times forward earnings and around 55 times management's free cash flow forecast.
Still, the stock can be worth that price if management executes on the potential to keep growing its advertising business, increasing its operating margin and free cash flow in the process. It's not too late to buy shares at $1,000, and a stock split could give investors even more confidence that management continues to see progress in growing users and revenue.
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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. Adam Levy has positions in Meta Platforms and Netflix. The Motley Fool has positions in and recommends Meta Platforms and Netflix. The Motley Fool has a disclosure policy.
