Alphabet’s stock price is now much lower, which could make it more attractive to retail investors.
Earlier this year, Google parent Alphabet (GOOGL 1.35%) (GOOG 1.29%) announced plans for a 20-for-1 stock split. It officially went into effect at the close on Friday, and today marked the first day of trading in its new, shrinking share price.
When a company creates a lot of value over a long period of time, its stock price often yields high returns. In the case of Alphabet, its shares have risen to $2,235.55, which is a bit pricey for investors with little cash.
What Alphabet’s stock split is and isn’t
A stock split adjusts the number of shares outstanding in a particular company, which in turn changes the share price. In Alphabet’s case, a 1:20 split means that each existing investor now owns the 20 shares of each share they previously owned, reducing the price per share from $2,235.55 to $111.77. The dollar value of their positions remains the same.
It’s a more enticing proposition for smaller investors because they no longer have to shell out thousands of dollars for a single Alphabet stock.
The stock split is purely cosmetic and doesn’t affect the company’s intrinsic value, but it does require a small adjustment to Alphabet’s EPS calculations. Now that Alphabet has 20x more shares outstanding, all of the company’s past EPS must be divided by 20 to account for this.
For example, Alphabet generated $74.5 billion in net income (profit) over the past four quarters, which translates to $110.56 in earnings per share before the split. But now that number has to be divided by 20, and the EPS is $5.53. This is only relevant to Alphabet’s past earnings results; in future reports, the company will make adjustments.
Buy a company, not a stock split
Stock splits have made headlines throughout 2022, not only for Alphabet but for a handful of other big tech companies as well. However, investors should always remember that a company’s fundamentals are the only things that can create value and drive its stock price higher over the long term.
Alphabet is one of the most solid tech companies in the world, thanks in large part to its flagship brand, Google. Google has a 91% market share in the internet search industry, making it difficult to disrupt — many competitors, including Microsoft, have tried, but the company’s Bing search engine has only 3% of the world’s share.
Google search accounted for 58% of Alphabet’s $270.3 billion in total revenue over the past four quarters, so it’s also the company’s financial engine. But Alphabet has grown to be incredibly diverse, so it also has significant contributions from other businesses. The company has a growing hardware division that makes Pixel smartphones, Pixel Buds headphones, and the Nest line of home devices — just to name a few.
Alphabet also owns the world’s leading YouTube video platform, which generated $29.7 billion in ad revenue last year and has about 2 billion monthly active users. Considering that Google bought YouTube for $1.65 billion in 2006, it’s safe to say the bet paid off. The best results may not yet come, as the YouTube Shorts format has proven to be a serious competitor to ByteDance’s TikTok, which is already serving users despite launching only two years ago.
Alphabet stock is worth a lot
Stocks have had a rough year, but the tech sector has been particularly weak. The tech-heavy Nasdaq 100 is down 26.5% so far this year, firmly in a bear market. As a result, Alphabet stock is down about 21% from its all-time high — a possible buy point.
Investors worry about high inflation and rising interest rates, which could dampen consumer spending and slow economic growth. Since Alphabet relies on advertising revenue for much of its business, it could feel pressured if those conditions persist or worsen. But good news may be on the horizon, as those pressures are now showing signs of easing.
Earnings per share for the past four quarters are $5.53, and at a current share price of $111.77, Alphabet trades at 20.2 times earnings. That’s 18% cheaper than the Nasdaq 100, which currently trades at a multiple of 24.7; it represents an opportunity given the diversity of Alphabet’s business.
The company has a successful track record and remains an innovation leader. It’s a great stock to own right now, even more so when the economy recovers, and thanks to the stock split, smaller investors now have a chance to get involved.