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Here’s Why Netflix Is Ripe for a Stock Split

Here’s Why Netflix Is Ripe for a Stock Split
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  • Netflix’s stock recently hit a five-year high of nearly $550, raising the possibility of a stock split.
  • The streaming giant has had two stock splits since going public.
  • Though the streaming market leader disappointed Wall Street on some metrics in the Q2 results, the stock’s consensus estimate is OVERWEIGHT.

Netflix (NASDAQ: NFLX) stock recently hit a record high of nearly $550. Though the streaming giant disappointed investors on Thursday with a cautious growth outlook, Netflix still has a lot going for it.

Despite the stock dropping by around 7% after announcing second-quarter results, the optimism over continuing growth still exists. The stock is thus likely to reach and even surpass the levels where the share price was when it last split in July 2015 – $650.

While a stock split doesn’t necessarily have to happen at that level, the chances increase the pricier a share gets. So far this year the stock has gone up by over 60%. Since going public, the streaming giant has split its share twice.

Here is why the Netflix stock still has more upside potential:

1. Netflix’s market leadership is solid

The entry of new competitors, such as Disney+, was expected to stall Netflix’s growth or even siphon subscribers. That hasn’t materialized. Netflix is still adding subscribers more than eight months after Disney+ launched.

Part of the reason is that some subscribers are paying for more than one streaming service. And even when Netflix loses subscribers, some still return after some time, pointing to the stickiness of its content. Netflix is additionally recording impressive subscriber growth outside the U.S. and Europe, where the market is not saturated.

In the most recent reported quarter, the streaming giant added 10.09 million subscribers, beating consensus estimates of 8.26 million. This was an increase of 23.4% from the same period a year ago.

Revenues for the quarter meanwhile increased by nearly 25% from last year’s Q2.

Netflix has enjoyed double-digit revenue growth for nearly 30 quarters. | Source: @CharlieBilello/Twitter

2. There will be no Netflix content drought

Following the lockdown measures instituted around the world to control the pandemic, there were fears that Netflix would run out of new content owing to the disruption of production. Now those fears seem unlikely to materialize.

Part of the reason for this is that Netflix’s planned content for 2020 had already been completed or was nearly complete by the time the lockdown measures were put in place. This has given the streaming giant advantage over newer rivals who are just wrapping their heads around the streaming model.

Despite the pandemic, Netflix has an extensive library of new shows planned for this year. | Source: @BloombergAsia/Twitter

And Netflix doesn’t appear like it will run out of content even if the pandemic continues into 2021. For one, the streaming giant has nearly fully resumed production in some parts of the world, such as the Asia Pacific region. There are also places such as South Korea, where production was never really halted. In Europe and the U.S., production has resumed in some parts on a limited scale.

Additionally, the closure of movie theatres has left studios will films they are unable to distribute, and Netflix is looking to buy some of this content. And with each new day bringing positive news on the vaccine front, the pre-pandemic shooting schedule could resume before Netflix subscribers run out of new content to binge-watch.

3. More cash, more content

Netflix’s operating margins are on an upward trend. In 2020, Netflix expects to record an operating margin of 16%, while 2021 will register 19%. The streaming giant’s rising operating margins will improve Netflix’s free cash flow position, which is already much better than last year.

More cash will help the streaming giant commission or purchase more content, a critical factor in subscriber growth. Compared to rivals such as Amazon Prime and Hulu, Netflix is vastly outspending them.

Netflix significantly outspends key rivals such as Dsney+ and Amazon Prime Video. | Source: @JonErlichman/Twitter

So far this year, Netflix has been free cash flow positive. In the just reported quarter, the streaming giant recorded free cash flow of $899 million. Last year’s free cash flow in the second quarter was -$544 million.

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