A stock split can be a signal from a company's management that it expects the recent strong price performance of its stock to continue into the future. Splitting shares won't change the fundamentals of the underlying business, but it can make the stock price more manageable for things like stock-based compensation and options trading. For investors who favor a buy-and-hold strategy, a stock split can still draw a lot of interest to a particular stock, leading to a further run-up in price.
Investors can do well by finding potential stock-split candidates. Getting in before a company announces a split allows investors to benefit from the boost in interest from the announcement. But it's just as important that the company is already on a strong financial footing and that the stock can continue climbing whether its shares split or not.
That's why both Meta Platforms(NASDAQ: META) and Netflix(NASDAQ: NFLX) offer interesting opportunities after soaring 390% and 300%, respectively, since the market bottomed on Oct. 12, 2022. Both are trading at nominal prices that could lead to a stock split in 2025, and Wall Street still sees significant upside for each of them.
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1. Meta Platforms: Up 390% from October 2022
Meta's results since 2022 are the outcome of a clear focus by management. CEO Mark Zuckerberg called 2023 the "year of efficiency" for his company. He aimed to curb operating expenses wherever possible and focus heavily on the things that could truly move the needle for Meta.
The result was a 62% increase in operating earnings in 2023 and a 52% increase through the first nine months of 2024. That's despite a huge increase in spending on artificial intelligence.
Artificial intelligence is at the core of Meta's business. It uses machine learning algorithms to determine the best content to show users at any given time, leading to strong engagement and high advertising conversions (leading to high ad prices). With the advancements in large language models, Meta overhauled its recommendation engine with great success.
Generative AI could lead to more content for its user-generated content apps, more engagement between businesses and customers on its messaging apps, and more advertisers testing multiple ads across all of its properties. Zuckerberg sees generative AI as completely transforming the business. One day, he says, a business will be able to tell Meta its advertising objective and budget, and AI will take care of the rest.
Meta stock trades at $620 as of this writing. A stock split could bring the nominal price back in line with other high-flying tech stocks that had their own splits in recent years. Meanwhile, the median price target on Wall Street is $660 per share, implying just 6% additional upside from here. However, the current stock price is less than 25 times analysts' 2025 earnings expectations, which is an absolute bargain compared to most other big AI stocks. Analysts may need to revise their price targets, and not just because of a potential stock split next year.
2. Netflix: Up 300% from October 2022
Netflix's growth over the past two years was invigorated by two major changes at the streaming video pioneer.
First, the company introduced an ad-supported tier in late 2022. Since then, it's gone on to attract 70 million viewers to the low-cost option. That's helped reinvigorate its subscriber growth, which grew 27% over the past two years. Advertising has also opened up more content opportunities for Netflix, including live events and sports.
At its current scale, Netflix has become a very attractive platform for marketers to work with directly. Netflix launched its own advertising technology in select markets earlier this year, and it plans to roll out its platform to all of its ad markets next year. As it grows the advertising business, improving monetization, there's infinite revenue upside without the challenge of constantly raising prices for subscribers.
The second thing Netflix did was crack down on password sharing. With the launch of the more affordable ad-supported option, Netflix felt there was no reason it should tolerate customers sharing accounts across households. While it felt some growing pains, it ultimately worked out in a strong uplift in subscriber revenue.
While the impact of the password-sharing crackdown is fleeting, Netflix still has opportunities to grow its subscriber base in international markets. Meanwhile, it should be able to grow revenue per membership in more established markets through better advertising monetization and pushing its ad-free subscription prices higher.
Netflix stock currently trades for about $920 per share as of this writing. That's above its stock price from its last split back in 2015, when shares traded around $700 per share. The average analyst has a buy rating on the stock, and JPMorgan analysts recently put a $1,010 price target on the stock, implying nearly a 10% upside over the next year.
Netflix's stock valuation has climbed considerably higher over the past two years, with the stock now trading for 46 times forward earnings estimates. However, with a lot of operating leverage in the business, it could show very strong earnings growth for years to come. The stock proved a great opportunity for investors when it traded for a much higher multiple in the 2010s amid a significant transition period for the business. It could repeat history as it shifts more of its revenue to advertising over the next decade.
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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.
