The Real Reason ServiceNow & Netflix Are Splitting Stock (It's Not What You Think)

Key takeaways

Stock splits are primarily administrative changes and do not fundamentally alter the value of a company.
ServiceNow and Netflix use stock splits to manage employee stock options and maintain engagement.
Investor psychology plays a significant role in the pricing of stocks post-split despite unchanged ownership.
Long-term investors should prioritize growth metrics like Free Cash Flow per Share rather than short-term stock price volatility.

Summary

Overview of Stock Splits

In this episode, the hosts discuss the concept of stock splits, particularly focusing on the recent announcements from ServiceNow regarding its 5-for-1 stock split and Netflix's upcoming 10-for-1 split. They explain that while stock splits create buzz and a perception of increased value, they are largely administrative changes reflecting a company’s growth and compensation strategies.

The Mechanics of ServiceNow and Netflix Splits

ServiceNow’s stock split is aimed at facilitating employee stock awards, making it easier to reward employees without dealing in fractions of shares. The company is growing steadily, with its software subscription model yielding revenue over $12 billion. Similarly, Netflix's split is positioned to help manage its compensation program due to its high share price, which has risen significantly following robust revenue growth and new global expansion strategies.

Investor Implications of Stock Splits

While a stock split increases the number of shares an investor holds, the overall value and stake in the company remain unchanged. The hosts use pizza as an analogy to illustrate that cutting a single share into multiple does not alter the actual ownership. However, stock splits historically coincide with rising prices, creating a self-fulfilling prophecy as investor psychology kicks in.

Long-term Investor Focus

Both hosts urge that despite the initial enthusiasm surrounding stock splits, the real focus for long-term investors should be on metrics like Free Cash Flow per Share and revenue trends rather than immediate stock price movements following a split. As both ServiceNow and Netflix continue to innovate and grow, these fundamentals will drive enduring investor confidence.

Show notes

ServiceNow and Netflix are splitting their stock in late 2025! In this video, we break down ServiceNow's 5-for-1 split (happening in December) and Netflix's 10-for-1 split (in November).

We dive into the key reasons why high-growth companies like these, which have seen awesome revenue growth, choose to split their stock, including the often-overlooked motivation of managing employee stock awards and incentives.

Is a stock split a sign of a coming stock price increase? Historically, stocks tend to do well immediately after a split, but we explain why the real long-term focus should be on Free Cash Flow per Share and continued growth.

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Chapters:0:00:00 - Netflix & ServiceNow Stock Splits0:01:30 - ServiceNow's 5-for-1 Split Details0:01:57 - What ServiceNow Does (Workflow Automation, AI, Nvidia Relationship)0:03:55 - The Primary Reason for the ServiceNow Stock Split (Employee Compensation)0:05:30 - Netflix's 10-for-1 Split Details and Key Drivers (Global Expansion, Ad Tiers)0:06:40 - Stock Split Explained: Why More Shares Doesn't Equal More Value0:08:45 - The REAL Reason Split Stocks Often Keep Rising0:09:40 - What Long-Term Investors Should ACTUALLY Focus On If you found this video useful, please make sure to like and subscribe!

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Content in this video is for general information or entertainment only and is not specific or individual investment advice. Forecasts and information presented may not develop as predicted and there is no guarantee any strategies presented will be successful. All investing involves risk, and you could lose some or all of your principal.

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Nick and Kasey own shares of Netflix and Servicenow