When a company creates a significant amount of value over the long term, its stock will generally deliver high returns. In the case of Google parent Alphabet (GOOG 0.41%) (GOOGL 0.58%), its stock has increased in value nearly 40-fold since it went public in 2004.
It now costs about $2,265 to purchase a single share in Alphabet, making it a little pricey for most retail investors. To mitigate this issue, Alphabet will conduct a 20-for-1 stock split after the market closes on July 15.
Stock splits add no actual value
On Tuesday, Alphabet shares closed at a price of 2,265.26. If the stock split took place at that price point, investors would receive an additional 19 shares for each one they currently own, and each share would be worth about $113.26. The price change is entirely cosmetic. It doesn't change the overall intrinsic value of Alphabet as a company at all, nor does it alter the value of an investor's stake in it.
But the reduced stock price might attract some new, smaller investors that didn't feel comfortable buying fractional shares or didn't have access to fractional shares through their broker. In theory, this could trigger a surge of buying, which could increase the value of Alphabet's stock -- though any such uplift would likely be temporary.
A number of notable companies are engaging in stock splits in 2022. Amazon completed a split in June, as did Shopify. Electric vehicle powerhouse Tesla is expected to split its stock sometime after August.
But there's only one way investors should play these companies: Focus on the long-term potential of their actual businesses, rather than the transitory effects of moves like stock splits.
Alphabet finds strength in diversity
Alphabet has grown into a technology powerhouse that transcends Google, its flagship brand. Its business units include cloud services, a world-leading video platform (YouTube), and a hardware segment featuring products like the Pixel smartphone and Nest home devices.
Google Search is still the star of the show when it comes to revenue, accounting for over half of the company's $270 billion in total sales over its last four reported quarters. But advertising revenue from YouTube also contributed a notable $29.7 billion.
YouTube recently launched Shorts, a new format designed to compete with ByteDance's TikTok, the leading short-form video app. So far, Shorts has attracted 1.5 billion monthly active users, which places it level with TikTok according to publicly available data.
Since this video format is most popular with younger users, it could become a major revenue driver for Alphabet as advertisers focus on capturing the attention of that audience segment.
On top of that, Google Cloud is growing faster than the rest of Alphabet as a whole. It only accounts for 8.5% of the company's revenue now, but the cloud opportunity could be worth over $1.5 trillion annually by 2030, so investors should keep a close eye on that part of the business. Google Cloud offers customers a wide range of services, from collaborative documents to data storage to advanced artificial intelligence and machine learning tools.
Buy the business, not the stock split
The stock market has had a rough 2022 so far, and the technology-centric Nasdaq-100 index is well into bear market territory with a decline of almost 28% year to date. Alphabet stock has fared slightly better -- down about 21.5% for the year -- but at current levels, it might present a long-term opportunity for investors to buy in at a discount, irrespective of the coming stock split.
Alphabet's business is sensitive to shifts in the broader economy because such a large fraction of its revenue comes from advertising. Businesses spend less on marketing when times are tough, but when the economy is strong, they invest heavily in attracting more customers.
With inflation high and interest rates rising, there might be a slowdown in economic activity for the rest of 2022, and analysts predict that Alphabet's earnings per share (EPS) will be flat compared to 2021 as a result. But those same analysts expect the company to rebound strongly in 2023 with earnings growth of 18%.
On a trailing 12-month basis, Alphabet has generated $110.56 in EPS (divide this by 20 after the stock split), so its stock currently trades at a price-to-earnings multiple of 20.4. That's a 20% discount to the Nasdaq-100 index which trades at a multiple of 24.6, so now might be the time to buy the dip in Alphabet stock. Since the market is forward-looking, waiting until next year might be too late.