Alphabet Just Made Its Pitch to Join the Dow Jones Industrials

As often happens, the stock market had a positive start to the month, continuing to bounce back from big losses in January. Gains for the Nasdaq Composite (^IXIC 0.10%), Dow Jones Industrial Average (^DJI -0.11%), and S&P 500 (^GSPC 0.02%) were all roughly in sync, reflecting overall optimism about Wall Street's ability to rebound from the worst start to a year in a long time.

Data source: Yahoo! Finance.

After the closing bell, Alphabet (GOOGL 0.55%) (GOOG 0.74%) released its latest earnings report, and investors were pleased with the news it gave. Yet they seemed even happier about another announcement from the Google parent -- an announcement that, while meaningless in itself, could have ramifications for whether the tech giant ever becomes part of the Dow Jones Industrial Average.

Image source: Getty Images.

Alphabet gets an A+

Shares of Alphabet were up almost 2% in the regular session before the quarterly financial report came out. They vaulted higher by another 8% in after-hours trading after its release.

Alphabet's financial results were even better than most had expected. In the fourth quarter, revenue jumped  32% year over year to $75.3 billion. Net income of $20.6 billion was 36% higher than in the year-earlier period, translating to earnings of $30.69 per share. That closed a strong 2021 for Alphabet, with revenue up 41% and net income soaring 89% from 2020 levels.

Alphabet saw strength across its product line. Google search revenue rose 39% and still represents the majority of the company's sales, but YouTube and the Google Network both contributed with roughly 25% year-over-year gains. Google Cloud sales jumped 45% from year-ago levels.

Moreover, Alphabet continued to improve its financial condition. The company has almost $140 billion in cash and marketable securities on its balance sheet, up by $3 billion from three months ago. That stands against just $15 billion in long-term debt, most of which it raised at infinitesimal interest rates when the bond market offered capital at terms too good to refuse.

A split to a price the Dow Jones Industrials could live with

Alphabet also announced that it would do a 20-for-1 stock split. The move requires shareholder approval, which means that it will take months to implement. However, based on the company's prediction, investors could see the split take effect in July if shareholders give their assent to the proposal.

With the stock rising to around $3,000 per share after the earnings announcement, the 20-for-1 split would potentially bring Alphabet's price down to $150 per share. It wouldn't have any effect on the intrinsic value of the entire company, because shareholders would simply have 20 times as many shares that would be worth roughly one-twentieth of their previous value.

However, a stock price around $150 would open the door for the managers of the Dow Jones Industrials  to consider inviting Alphabet into the Dow 30. The price-weighted index couldn't have handled Alphabet's $3,000 stock price, as it would give the tech giant disproportionate influence in calculating the Dow.

It's premature to assume that Alphabet will eventually get a Dow invitation. However, current Dow components Intel (INTC 0.64%) and Cisco Systems (CSCO 0.06%) have seen their share prices languish by comparison, giving them only minimal influence in the average.

With a market capitalization of nearly $2 trillion, Alphabet's omission from the Dow is fairly noteworthy. The company's move today would potentially give the Dow a chance to remedy the situation later in 2022.