Of the three, Alphabet is perhaps the most surprising because the original founders of the company famously heeded for years Warren Buffett’s advice to NOT split shares. The U-turn in favor of a split has many wondering if there are advantages to buying in before the upcoming 20-for-1 stock split scheduled for July 2022.
What Is a Stock Split?
A stock split is relatively straightforward. This process involves a company splitting outstanding shares into a larger pool of shares — a factor of two, three, four, 10, or any other number or ratio can be selected. The split does not affect the market capitalization of the company. However, it does change how many shares are in circulation and the price of those individual shares.
Think of it this way. If you have a $100 bill and exchange it for five $20 bills, you still have the same value ($100), but the number of bills has increased, each worth 20% of the original bill.
When a company completes a stock split, the concept is the same. For example, if company X has 10,000 outstanding shares for $100 per share, the company’s market capitalization would be $1,000,000. If the company decides on a 2-for-1 stock split, there will be 20,000 shares, each priced at $50. The market capitalization stays the same.
Why Are Tesla, Amazon & Alphabet Splitting Stocks?
The decision to split shares is generally to make them more affordable to even more investors.
Although a high-priced stock is a good sign, many ordinary investors can no longer afford the elevated price levels. If a company lowers its share price through a stock split, theoretically it means more buyers than would otherwise be the case, and so it’s bullish for the security.
Apple is a prime example of how effective this strategy can be. In 2020, this tech giant issued a 4-for-1 split — and retail investors flocked to buy lower-priced shares, which post-split were trading at 25% the former (pre-split) price. The old rule of thumb in investing circles is that a share price will eventually trend back to pre-split levels. That phenomenon has happened many times already with Apple over the past decade.
So, why would you want to buy into GOOGL’s pre-stock split?
3 Reasons to Buy Alphabet Before Its Stock Split
As we’ve covered, stock splits don’t change a company’s intrinsic value. However, buying before a split could result in a short-term bump, especially when it’s an undervalued stock.
Considering this is the first time Alphabet has split its stock in eight years, there’s been quite a bit of hype following the announcement. Investors often chase splits, which we’ve seen with companies like Tesla and Nvidia.
Here are three reasons why Alphabet is potentially undervalued, making it an attractive buy.
1. Plenty of Room for Growth
There’s no denying that Google is the dominant global search engine. However, that doesn’t mean the company is done growing — far from it. Although Alphabet’s digital advertising empire across YouTube, Search, and third-party networks is stronger than ever, Google Cloud has the potential to be another massive growth lever.
A few tech giants dominate enterprise cloud infrastructure, and Alphabet is one of them (behind only Amazon and Microsoft). This market currently offers one of the most promising growth opportunities, with Google Cloud Platform growing 47% in 2021.
2. Alphabet’s Advanced Tools and Acquisitions
Alphabet has invested in artificial intelligence for Cloud, Search, and its Other Bets segment, which covers a portfolio of high-risk bets featuring “tomorrow’s technology”, such as quantum computing and self-driving cars.
In recent years, Alphabet has also made several acquisitions, seeking specific technologies — Fitbit and the cybersecurity firm Mandiant are just two examples. This strategy is laying the groundwork for potential future breakthroughs.
3. Cheap Valuation
Alphabet’s price seems steep per share, but it’s currently trading at less than 25 times this year’s earnings estimates.
Most would agree the current price of GOOGL shares is fairly cheap considering Alphabet’s 2021 financial report. The company grew by 41%, and operating income increased by 91%. For the fiscal year 2021, Alphabet reported revenue of $257.6 billion, up from $ 182.5 billion in 2020.
Should You Buy Alphabet Now?
When it comes time to split, GOOGL stock’s buzz could cause a short-term spike in stock price. However, the announcement of a stock split isn’t a reason to buy a stock for the long term.
The Bottom line? If you think a pre-split stock is undervalued, like Alphabet, and you’ve had your eye on it, now is as good a time as ever to buy in. As of April 2022, there isn’t any reason to wait if you’re bullish on Alphabet unless you don’t have around $2,800 to purchase a share, and your brokerage doesn’t offer fractional shares.
In this case, the nearly $3,000 stock will be trading for around $150 a share following the Fourth of July holiday. Although that means the stock would be near its all-time high, as a long-term investor, there’s a place for Alphabet in your portfolio, and when holding onto this stock, you’ll experience the benefits of a stock split in the coming years.