Alphabet (GOOGL 10.22%) (GOOG 9.96%) has plans for a 20-for-1 stock split on July 15. While stock splits don't affect the intrinsic value of a company in any way, they do create the perception for some retail investors that the stock is now more affordable and perhaps now within their price range to invest in. It also makes the stock a viable option for those investors who don't have brokers offering fractional shares.
Separate from the stock split news, Alphabet has been caught up in the broader market sell-off in 2022. The tech giant's stock price is down about 28% from highs hit in November.
The combination of the stock split (which creates a short-term bump in investor interest) and the price dip (which is likely to be temporary) is creating a great opportunity for long-term investors to get in on this tech growth stock at a reasonable price. Five years from now, I suspect many an investor will either be thanking themselves or kicking themselves, depending on if they purchased Alphabet stock or passed up the chance.
Let's consider why Alphabet stock is a buy at these prices.
Google is the world's most dominant search engine
In its first quarter, which ended on March 31, Alphabet's Google search segment delivered $39.6 billion in revenue. That increased from the $31.9 billion it earned in the same quarter the year prior. Google boasts an 85.5% market share of search engine traffic worldwide. Couple that with the fact that many purchase decisions begin with a search query. You can understand why marketers are jumping over themselves for favorable placement in Google search results.
Google services, which include advertising revenue from YouTube, totaled $61.4 billion in revenue in the earlier quarter, up from $51.2 billion in the previous year. YouTube is no slouch of its own, boasting over 2 billion monthly active users. It is yet another Alphabet property that commands many consumers' attention. Best of all, these services are free to the public.
Of course, competing against a free product is difficult, which explains why Alphabet has managed to sustain a dominant position in the industry for as long as it has. Indeed, revenue has exploded from $46 billion in 2012 to $258 billion in 2021. Impressively, despite offering its services for free to users, Alphabet has managed to generate an operating income that has risen from $13.8 billion to $78.7 billion in that time.
GOOG Revenue (Annual) data by YCharts
With no imminent threat to Alphabet's dominance, investors can expect it to sustain revenue and profit growth for several years. Globally, advertisers spent $763 billion in 2021, 23% higher than 2020. Increasingly, budgets are moving to digital channels that make measuring return on investment more manageable. Given that Alphabet's revenue has exploded in the last decade, it is reasonable to infer it delivers excellent returns to advertisers.
Alphabet is an excellent business selling at a bargain valuation
GOOG Price to Free Cash Flow data by YCharts
Alphabet stock is trading at a price-to-free-cash-flow ratio of 21 and a price-to-earnings ratio of 20. According to those metrics, Alphabet's stock is as cheap as it's been in the last five years. Indeed, it can be challenging to consider buying stocks during a sell-off, but investors could regret not adding Alphabet to their portfolios at these prices in future years.
