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.
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.
