Stock splits seem to be all the rage in 2022, as the volatile stock market has some of the world's largest companies reaching for unconventional tools to attract new investors. It tends to work for a short period of time -- every stock split announcement so far this year was met with a stock price gain on the day.
With the Nasdaq-100 Technology index in bear-market territory and a year-to-date loss hovering around 25.8%, those small wins can be valuable.
Alphabet (GOOG 0.74%) (GOOGL 0.55%) is the parent company of Google, and it recently announced a 20-for-1 stock split that will take effect on July 15. That means its current stock price of around $2,290 would be reduced to $114.50, theoretically making it more affordable for smaller retail investors to buy. But stock split or not, here's why Alphabet is worth buying while it's down amid the broader tech sell-off.
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Sales remain elevated
While stock splits add zero value to the underlying company, Alphabet's operational performance certainly does. The company announced its financial results for the first quarter of 2022 last week, and they were met with mixed feelings among investors.
The pandemic was a booming environment for Alphabet's business because continued stay-at-home trends drove a surge in online activity. It boosted the use of search engines like Google, and even the company's leading video platform, YouTube. But now that most COVID-19 restrictions have eased, investors are concerned that Alphabet's growth will slow significantly.
The company's Q1 results show revenue remains at lofty levels, although its year-over-year growth of 23% was slower than the prior-year period.
It's entirely possible slower growth is the norm in 2022 as Alphabet finds its footing in a world where the pandemic is less of a factor. But it's unlikely we've seen the last of the company's stellar past performance, as underlying growth remains strong in certain segments.
The cloud continues to shine
Cloud computing is one of the most exciting technologies at the moment because it allows companies to migrate their operations online and work collaboratively in the digital realm, often ignoring country borders. Not to mention, providers of cloud services like Google offer incredibly powerful low-code tools to develop advanced tech like artificial intelligence and machine learning.
Google Cloud makes up a small percentage of Alphabet's total revenue, but it consistently grows at over 40%, which is much faster than the rest of the company.
Some estimates suggest the cloud industry overall could be worth over $1.5 trillion annually by 2030, so based on Alphabet's quarterly cloud revenue the company has barely scratched the surface of that opportunity. If cloud revenue continues to outgrow Alphabet's total revenue, it will gradually become a much larger contributor to the company's results.
Why investors might regret not buying Alphabet
Alphabet stock has tumbled nearly 25% since November 2021 amid the tech sector sell-off, which brings up perhaps the most enticing part about it: its valuation. The company generated $112.20 in earnings per share during 2021, placing its stock at a price-to-earnings multiple of just 20.
For context, the Nasdaq 100 index sits at a multiple of 30 right now, meaning Alphabet stock would have to soar by 50% just to trade in line with the broader market.
Alphabet's projected growth rates in 2022 might be the culprit for the steep discount. After a strong pandemic period, analysts expect a modest year for the company, with a revenue jump of 16% and an earnings increase of less than 1%.
But in 2023, earnings could roar back to expand by almost 19%, according to early projections. The problem is that, if investors wait until then, it might be too late. Looking back in a few years, now might prove to have been the best time to buy Alphabet purely on a value basis. After all, Google owns 91% of the online search market and people are not going to stop using the internet anytime soon.
