Unsuspecting Netflix (Nasdaq: NFLX) investors might be startled this morning if they glance at a stock price chart for shares in the TV streamer.
As of the time of this writing, popular stock tracking sites like Yahoo Finance and apps like Apple Stocks are showing that Netflix’s shares dropped more than 90% on Friday, when they began the day trading at more than $1,100. Those same charts now show that NFLX shares are trading at “just” around $111 each.
But don’t panic. Netflix’s shares haven’t actually lost 90% of their value. NFLX stock just split. Here’s what you need to know.
Why are Netflix shares trading so “low”?
Netflix shares are currently trading at around $111 in premarket. That’s roughly 90% less than where the stock was trading when the bell closed on Friday. So what’s happened?
Netflix shares did indeed trade at over $1,100 on Friday (the company’s shares have traded in the four-digits for months). But when markets closed on Friday, Netflix initiated its previously planned 10-for-1 stock split.
As Fast Company previously reported, Netflix announced in October that it would split its stock 10-for-1 after the close of the market on Friday, November 14. NFLX shares would begin trading at their new split-adjusted price when markets opened on Monday, November 17, which is today.
So that dramatic stock price “fall” that you are seeing on some financial charts this morning isn’t actually a fall in the value of Netflix’s stock. It’s just a temporary display of the difference between the pre- and post-split adjustment in Netflix’s share price.
And even though Netlfix’s shares are trading at 90% less than they were on Friday, qualifying investors who owned the shares that day will find they now have nine additional NFLX shares for each one they previously had, meaning the total value of their Netflix shares are the same (provided they did not sell any between now and then, and adjusting for any early-morning trading increase or decrease today, of course).
Why did Netflix split its stock?
Companies split their shares for a variety of reasons. In Netflix’s case, when the streaming TV giant announced its share price split on October 30, it said it was doing so to “reset the market price of the Company’s common stock to a range that will be more accessible to employees who participate in the Company’s stock option program.”
Many large companies offer employee stock purchase plans that let their employees buy shares at a slight discount on a monthly or quarterly basis. When employees buy stock in the company they work for, it generally incentivizes them to ensure the company performs as well as possible, so their personal shares increase in value.
The problem for Netflix was that its shares were trading at over $1,000 apiece and, even with its employee purchase plan discounts, that put even a single share of the company out of reach for many employees.
But with the stock now trading at around $111 per share, a single share is much more affordable to the average employee.
Could Netflix’s stock split benefit its share price?
It’s important to note that stock splits don’t change the fundamental value of a company. A company with 10 shares valued at $1,000 each is worth the same when it is composed of 100 outstanding shares valued at $100 each. The total value of all the company’s shares remains the same pre- and post-split.
However, the lower value of a post-split share can make the stock more attractive to retail investors, who normally might balk at (or be unable to afford) a single share valued at $1,000.
Those same investors may decide, or now be able to afford for the first time, to pick up shares in the same company if a single share now costs only a few hundred dollars.
And if more retail investors start buying shares post-split because the individual share price is now more affordable, that could boost the company’s stock price. In this way, share splits can potentially benefit a company’s stock price—not because of the split itself, but because investors react to the stock’s now lower price.
Whether that potential benefit actually materializes in Netflix’s stock remains to be seen.