Is Netflix a Buy After the 10-for-1 Stock Split?

With the market's attention shifting to red-hot industries like generative artificial intelligence (AI) and quantum computing, video streaming giant Netflix (NASDAQ: NFLX) has been somewhat under the radar. But that isn't stopping the stock from growing. Shares have actually risen by over 300% in the last three years, which isn't too shabby compared to the S&P 500's average return of "just" 77% over the same time period.

The growth has sent Netflix's stock price to about $1,100, which makes it less accessible to smaller investors and employees who might not have access to fractional shares. In response, management has announced a 10-for-1 stock split that will go into effect on Nov 14. Let's discuss the potential impact of the stock split and (more importantly), dig deeper into Netflix's fundamentals to decide if it's still a good buy.

Stock splits are an exciting, but superficial change

Some researchers have found that stock splits correlate with positive future returns compared to the market. This trend is likely because stock splits make the shares more accessible (both psychologically and literally) to retail investors. And companies often split their stock after experiencing healthy growth, and the positive momentum continues.

That said, while stock splits change the price of each individual share, they don't change the total value of a company's stock put together (its market cap). They are superficial changes that don't influence a company's valuation relative to earnings or growth. And over the long term, investors will be better served by focusing on fundamentals.

Third-quarter earnings were respectable

Unlike other big tech companies, Netflix isn't a beneficiary of generative AI-related demand. But that doesn't mean it isn't growing. Third-quarter sales jumped 17.2% year over year to $11.5 billion as the company hit its highest quarterly market share in the U.S. and U.K. Netflix continues to enjoy success with its original programming and sports events such as the Canelo vs. Crawford boxing match, which broke records to become the most viewed men's championship fight of the century.

While Netflix already boasts over 300 million paid memberships, that doesn't mean long-term growth will stall any time soon. The company has pursued a truly globalized business model with a presence in over 190 countries. This means its total addressable market will expand as it creates more localized content for emerging markets and benefits from rising incomes and internet penetration in developing countries.

Image source: Getty Images.

For example, according to Reuters, Netflix had only 10 million Indian users as of 2024. That's less than 1% of the country's 1.45 billion population, leaving plenty of room for growth as Indian wealth increases over the coming decades.

Netflix has plenty of room for expansion in developed markets as well. While the company has driven subscription growth through tactics like cracking down on password sharing, the bigger opportunity will come from generating more revenue out of its existing user base. The company's ad-supported tier has turned into a big success. And while Netflix doesn't separately disclose how much its ad business is generating, management expects the segment to double this year.

Is Netflix stock a buy?

If there is any downside to Netflix, it would have to be valuation. After rallying strongly over the last three years, the stock now boasts a forward price-to-earnings (P/E) multiple of 37, which is pricey for a company that only grew third-quarter net income by 8% year over year (to $2.5 billion). For context, the S&P 500 has an average forward P/E of 22, and red-hot tech leader Nvidia trades for a forward P/E of just 30 despite growing its net income by 59% over the prior year period.

Netflix remains a compelling stock to buy because of its substantial long-term growth potential in both developed and emerging markets. But investors shouldn't think they are getting a good deal right now, stock split or not.

Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Netflix and Nvidia. The Motley Fool has a disclosure policy.