Alphabet (GOOGL -1.42%) (GOOG -1.31%) just released its last earnings report before its anticipated stock split in July. After the release, the stock price dropped, likely because of challenges in the ad market and other issues.
However, the upcoming stock split should spark interest from a new class of investors. Moreover, with the stock price falling further amid challenges, the stock split could bring about an intriguing buying opportunity for prospective shareholders of this communication stock.
Alphabet's stock split
In its fourth-quarter 2021 earnings report, Alphabet revealed it would initiate a 20-for-1 stock split that will take effect at the end of the business day on July 15.
Although splits do not directly change the financials, a lower nominal price offers some advantages. The lower price could make Alphabet eligible to become a Dow 30 stock. The Dow Jones is a price-weighted index, meaning a high nominal price means the stock holds a disproportionate influence over the index. The upcoming stock split solves this problem.
Moreover, the lower price should help its tickers maintain adequate liquidity. As conditions stand now, Alphabet's A-share volume of 1.7 million pales in comparison to the recently split Apple, whose average daily volume exceeds 85 million. Still, it is more active than the A shares of Berkshire Hathaway. At around $500,000 per share, its average daily volume is just under 3,000 shares.
Finally, at approximately $2,300 per share for both its Class C and Class A shares, these two tickers make up the fifth- and sixth-most expensive shares, respectively, trading on U.S. markets. This means that small investors may have to purchase partial shares if they want to buy Alphabet stock. With a post-split price of about $115 per share at current prices, whole shares will become affordable for more investors.
The state of Alphabet
Furthermore, the fresh earnings report for the first quarter of 2022 may point to some potential opportunities. Admittedly, investors did not react positively to this report, and the stock has fallen by about 25% from its 52-week high. But the report also pointed to reasons to treat the sell-off as an opportunity.
For Q1, revenue of $68 billion rose 23% compared with year-ago figures. While this does not compromise its long-term growth pattern, it represents a slowdown from the 34% growth reported in the year-ago quarter.
Ad sales, particularly with YouTube, experienced a significant slowdown compared with year-ago numbers. On the Q1 2022 earnings call, CFO Ruth Porat also pointed to a "tough comp" in its ad market in Q2, and the end of activity in Russia also weighs on revenue.
Also, net income fell 8% over this period, coming in at about $16.4 billion. This occurred because other income turned into a nearly $1.2 billion expense amid unrealized losses. In comparison, the company logged over $4.8 billion in other income in Q1 2021.
Furthermore, even though it lost money with Google Cloud, this segment generated revenue of $5.8 billion in Q1, 44% more than the $4 billion in the year-ago quarter. This will likely make the cloud a much larger part of the company in the future. Also, at a P/E ratio of just 21, Alphabet is much cheaper than its largest cloud rivals, Amazon and Microsoft, which sell for 44 times and 30 times earnings, respectively.
What the stock split means
In the end, the stock split opens up opportunities, particularly for small investors. Not only will whole shares become more affordable, but small investors will buy a company growing revenue at over 20% while paying about 21 times earnings.
Indeed, the ad market may become increasingly competitive. However, the cloud growth should continue to keep its revenue growth robust, likely making Alphabet stock a buy right now.