The New York Post ran a piece on Netflix (NFLX), written by Claire Atkinson, that was, to put it charitably, interesting. And by interesting I mean that it painfully misstated the very simple mathematics of stock splits.
The piece implied that NFLX is wildly overvalued. I have no problem with that. Not that I necessarily agree or disagree, but the marketplace – any marketplace – is comprised of buyers and sellers whose opinions differ on the value of whatever is being traded. If someone wants to call NFLX, a fast-growing company, pricey, that’s fair enough. On that score the Post may be right, they may be wrong. Time will tell. But I’ve no problem with the opinion itself.
CNBC reports that NFLX will split its stock between 5:1 to 10:1. So, if you own a share, you’ll wind up with maybe 5 shares, maybe 10 shares, maybe something in between, at 1/5 or 1/10 (or 1/x) the current price. All the company’s numbers will be adjusted to reflect the split.
Except at the NY Post.
The Post’s initial story ran like this:
In other words, if you’re a company who’s stock price is, say, $100/share and you have $1 of earnings – hence a P/E of 100 – you simply need to effect a 5:1 split and, voilà, you’ve magically lowered your P/E to a much more attractive 20. Hey, you might even attract a value investor or two!
That error – without any notice whatsoever – was subsequently corrected. I thought corrections were supposed to be noted. Most reputable news outlets do so. But I digress.
But wait, there’s more! The correction can be seen below along with the following few paragraphs, where things get interesting once again:
“Dire need for cash?” “Extra capital currency?” WTF? Quick thought exercise: If I ask you to change a $20 bill into four $5 bills, is it possible that my “impetus” for doing so is a “dire need for cash” or that I might use the “extra capital currency” (of which, of course, there is none) to make an acquisition or pay down debt that I wouldn’t have been able to do if I’d held on to the $20? Did no one think this through? Are the editors as innumerate as the reporters?
It’s clear to me why no one’s asked Reed Hastings about the “extra capital currency” – they don’t want to be laughed out of the room and never allowed on a call again.
So, to the NY Post, here’s quick primer on stock splits. And if you can digest that, here’s a primer on secondary offerings, which is how companies sometimes do satisfy their “dire need for cash” and raise “extra capital currency.” You’re welcome.