There's no denying that Alphabet (GOOGL -1.23%) (GOOG -1.10%) is one of the most recognized companies in the world. Google has become synonymous with search and the name has become a verb in the process: "Google it."
Its impressive business performance has also given rise to a surging stock price. Alphabet shares climbed 65% in 2021 and are up an impressive 266% and 927% over the preceding five- and 10-year periods, respectively. This pushed the stock price to near $3,000 per share -- but its about to get a whole lot cheaper.
Alphabet announced in conjunction with its fourth-quarter earnings report that the company plans to split its stock for the first time in eight years. This stunning revelation is bringing a fresh wave on interest to the tech giant and its stock. It also raises a number of questions of interest for investors involving just how a stock split works and what it means for investors.
Image source: Getty Images.
The details
The parent company of Google said this week that its board of directors had approved a 20-for-1 stock split. This will take place in the form of a special dividend, which will be subject to shareholder approval. Assuming Alphabet investors approve the measure, shareholders of record as of Jul. 1, 2022, will receive an additional 19 shares of stock for each share they own after the close of business on July 15.
That means that shareholders won't have to take any additional action in order to take part in the stock split. As with most such events, the brokerage will handle the details and the additional shares will simply show up in their investing accounts. It's important to note that the additional shares may not show up immediately after the market closes on July 15. The timetable varies slightly from brokerage to brokerage and can take several days before the new shares make an appearance.
It helps to give the process some perspective, so let's add some numbers for context. For each share of Alphabet stock an investor owns -- currently trading for roughly $3,000 per share (as of this writing) -- post-split shareholders will own 20 shares worth $150 each.
Does that mean a stock split is a good thing?
A quick review of the example provided above shows that the total value of their shares doesn't change. One share of Alphabet stock priced at $3,000 is worth the same amount as 20 shares worth $150 (20 x $150 = $3,000). The pizza analogy is probably the best way to illustrate this. When you buy a pizza, it doesn't matter if you cut it into 10 slices or 20 slices, you still end up with the same amount of pizza to eat. Likewise, Alphabet stockholders will simply have a greater number of lower-priced shares.
Image source: Getty Images.
Consequently, investors should avoid buying stock simply because of the pending split. There is frequently excitement around the prospect of a stock split, with investors temporarily driving up the share price. Some investors believe that the lower price fuels a commensurate increase in demand for the shares, but that phenomenon is almost always temporary. Over the long term, however, it's the company's business performance and financial results that will drive the stock higher -- or lower.
Does that mean Alphabet stock is a buy?
While the stock split in and of itself doesn't signal that Alphabet stock is a buy, there are plenty of other reasons to invest in the search giant. Investors need to look no further than the company's blockbuster fourth-quarter report.
Alphabet generated revenue of $75.3 billion, an increase of 32% year over year. Perhaps even more impressive was that revenue for the full year jumped 41%. At the same time, Alphabet's quarterly operating margin ticked higher to 29%, up from 28% in the year-ago quarter. This resulted in net income of $20.6 billion and earnings per share (EPS) of $30.69, which surged 38%. That's impressive growth, particularly for a company with a market cap of $1.94 trillion.
To give these numbers context, analysts' consensus estimates were calling for revenue of $67.4 billion and EPS of $25.44 -- so Alphabet cleared expectations by a wide margin.
There are other reasons to be optimistic. Google has nine products that boast more than 1 billion users: Android, Chrome, Gmail, Google Drive, Google Maps, Google Search, Photos, the Google Play Store, and YouTube. That creates a powerful network effect and a captive audience for additional innovative products.
Google is also a dominant force in digital advertising. While estimates vary, Google controls roughly 29% of total digital ad spending worldwide, even as it fends of increasing competition.
There's no denying the continuing trend toward digital advertising and the one-two punch of Alphabet's industry-leading position and its billions of users worldwide. Investors shouldn't buy shares based solely on the stock split. Rather, it's the company's history of robust performance and execution that makes Alphabet stock a compelling choice.
