There's no denying that Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG) has become a force to be reckoned with. Not many companies can boast that their signature product or service has become a verb: "Google it." Beyond search, Alphabet is a leader in digital advertising, smartphone operating systems led by Android, and cloud computing with its fast-growing Google Cloud.
Last week, the tech giant announced a historic 20-for-1 stock split, the first time Alphabet has pared its share size in eight years. Now, investors who were considering buying shares are faced with a perplexing question: Should they buy shares now, or wait until after the stock split?
Looking to the past can sometimes provide a glimpse into the future.
Image source: Getty Images.
A look back
It's been a long time since Alphabet split its stock. In fact, the last time this happened, the company was still named Google. That stock split occurred in 2014, while Google didn't change its moniker to Alphabet until late 2015.
What's noteworthy about the previous stock split was that it was responsible for the creation of Google's nonvoting Class C shares, while Class A shares retained the standard one vote per share. A shareholder lawsuit was filed in April 2012, which alleged that co-founders Larry Page and Sergey Brin engineered the stock split to retain control of the company, to the detriment of shareholders. With the stock split, the company was increasing the number of shares without a commensurate increase in the voting rights. That suit was eventually settled, allowing the split to go forward with compensation to shareholders.
During the nearly two years from the announcement until the actual stock split, Google shares climbed roughly 74%.
So, is a stock split a good thing? It's complicated...
Generally speaking, a stock split doesn't change the total economic value of the company that's paring its shares. One share of Alphabet stock priced at $2,800 is worth the same amount as 20 shares worth $140 (20 x $140 = $2,800). Much like a pizza, the number of slices doesn't change the overall size of the pie. However, some would argue that there's an underlying positive impact on investor psychology.
That certainly appeared to be the case when several high-profile companies made headlines over the past couple of years when investors rushed in to buy shares following stock split announcements. Apple (NASDAQ:AAPL) saw shares climb 34% in the month following the July 2020 announcement of its 4-for-1 stock split. Not to be outdone, Tesla (NASDAQ:TSLA) followed suit less than two weeks later with its own announcement of a 5-for-1 stock split. Between the time of its announcement and the completion of its stock split, shares surged 81%.
A similar phenomenon occurred in May 2021 when The Trade Desk (NASDAQ:TTD) announced its 10-for-1 stock split and Nvidia (NASDAQ:NVDA) unveiled plans for a 4-for-1 stock split. Shares of The Trade Desk and Nvidia climbed 27% and 24%, respectively, between the day of the announcement and the day the splits were completed.
Aptus Capital Advisor senior analyst and portfolio manager David Wagner weighed in on the situation, saying, "We all know that [a stock split] does not increase the fundamental value of a company. ... but from what we've seen in the market with Tesla and Nvidia, people like to chase splits."
Image source: Getty Images.
Reasons to be bullish
There are plenty of reasons to believe that Alphabet will continue along the same upward trajectory that led to this celebrated stock split.
Google's search dominance remains unchallenged, at roughly 92% of the worldwide search engine market. Alphabet has parlayed that into a leading position in digital advertising, with an estimated 29% of worldwide digital ad spending. Let's not forget Google Cloud, which has quietly ascended into the top three, behind just Amazon Web Services and Microsoft Azure.
Those drivers have fueled robust results for Alphabet. In the fourth quarter, revenue of $75.3 billion climbed 32% year over year, while operating margins ticked higher, helping drive earnings per share (EPS) to $30.69, an increase of 38%.
The fine print
For investors who are bullish on Alphabet, there isn't any reason to wait to buy shares, unless of course your financial situation prevents you from laying out nearly $3,000 per share. If that's the case, and your brokerage doesn't offer fractional shares, the stock split will make shares much more affordable in due course.
If you're planning to buy Alphabet shares now, be aware it might require a bit of extra record keeping. For those who buy shares now (at roughly $2,800), you'll want to remember to adjust your records to reflect the revised cost basis, dividing it by 20 to account for the newly minted shares ($2,800 / 20 shares = $140). This becomes important when you eventually sell your shares and settle up with the tax authorities. Fortunately, brokerages are old hands at this, so it shouldn't be much of a burden.
Given Alphabet's dominant market position, stellar execution, and continuing prospects, it really doesn't matter if you buy the stock now or wait until split-adjusted trading begins on July 18. As long as you buy them.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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February 12, 2022 at 06:15PM
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