Netflix Inc. (NASDAQ:NFLX) is generating mixed reactions in response to its 7-to-1 stock split that was announced on Wednesday. News broke that Netflix was finally doing a stock split that will have shareholders receiving 7 NFLX share for every share of the stock they own.
The news was gladly accepted in investment and trading circles. Shares of Netflix climbed 2.6% in after-hours trading after the news broke in Wednesday. The stock had another rally yesterday to touch a new 52-week high of $706.24.
Icahn Not Impressed
Despite the fact that investors were largely pleased with news of the stock split, some folks are not impressed with the stock. Activist investor, Carl Icahn starred the assault on Netflix when he announced that he had sold his remaining stake in Netflix. He sent a tweet saying, “sold the last of our [Netflix] today… Believed [Apple] currently represents same opportunity we stated [Netflix] offered several years ago.”
The stock stumbled immediately after Ichan’s negativity. The bullish momentum of the stock couldn’t hold and the shares of Netflix closed with a loss of $0.38% at $678.61. The stock has lost another 0.86% to $672.79 in pre-market trading today.
Jim Cramer is Indifferent
Jim Cramer of CNBC voiced in indifference to the stock split in a CNBC article titled “Netflix Split & I don’t care“. Cramer says the stock split is only cosmetic because it doesn’t create any value. It would have made more sense of Netflix decided to sell more shares outstanding. The stock split according to Cramer is like breaking a pencil into two – you might have 2 pencils but you don’t have more pencils.
The Split will Reduce Volatility for Netflix
Despite his indifference, Cramer seems to have a unique spin on the stock split scenario. The 7-for-1 stock split now means that the shares of Netflix will trade at less than $100. This new trading price will make the stock appeal to more retail investors who will find it easier to buy a $100 stock than a $700 stock.
Attracting retail investors will broaden the ownership base for Netflix and reduce volatility on the stock. Before now, the high trading price of Netflix keeps in the circles of institutional investors and hedge funds.
Those kinds of investors buy stock for trading and not ownership purposes. Hence, their short term focus in buying and selling always causes wild swings in the stock price. A good example is found in how the shares of Netflix closed with losses yesterday just because Icahn sold his shares.
Now, retail investors are more likely to buy shares of Netflix for ownership since most of them can associate with the brand their living rooms. A wide ownership base will reduce wild swings. In fact, hedge funds will now think twice before dumping shares of Netflix because of the 7X multiplier effect.