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Google shares are about to get cheaper, and it’s a good thing for investors

Posted: 2 February 2022 5:33 pm
News
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Google eyes off US$2 trillion in market capitalisation following latest share split.

Google's parent company Alphabet could join the US$2 trillion market cap club, after it announced a 20 for 1 split.

Shares of Alphabet surged almost 8% – rising to US$2,970 – in after-hours trading following the announcement of stellar earnings in the fourth quarter.

The company also states it intends to issue a 20:1 stock split.

The tech giant earned US$20.6 billion (or US$30.69 per share), well above the average estimate of US$28 per share.

Speaking on Alphabet's strong growth, CEO Sundar Pichai stated the deep investment in AI technologies continues to drive extraordinary and helpful experiences for people and businesses across our most important products.

"Q4 saw ongoing strong growth in our advertising business, which helped millions of businesses thrive and find new customers, a quarterly sales record for our Pixel phones despite supply constraints, and our Cloud business continuing to grow strongly," Pichai explains.

Despite the strong earnings, the biggest news for shareholders is actually the stock split.

This comes after fellow tech giants, including Apple, Microsoft and Tesla, have split their shares in order to make them more appealing to retail investors.

What is a share split?

Newer investors who have never seen a stock split before might be wondering what the company is actually doing.

When a share price gets higher, it becomes less liquid as investors have to pay more to buy in.

As such, in order to increase liquidity, a stock split occurs – meaning the existing shares are divided along with the price.

Put simply, a stock split is where 1 stock is divided into several stocks along with its share price.

Take, for example, the current split announced by Alphabet:

At 20:1, 1 stock in the company becomes 20, while the price of the stock is now one-twentieth its previous value.

What does this mean for investors?

Despite stock splits falling out of favour in recent times, Alphabet's share holders as of 1 July will receive 19 additional shares on 15 July for every share they hold.

However, this is not a free chance to cash in. The value of the shares do not change.

Take an investor who owns 1 share in either Alphabet class A or C.

After 15 July, the shareholder will go from owning 1 share in Alphabet to owning 20, but the value of each individual share will fall from US$2,750 to around US$137.

The company will trade from the new price as of 18 July.

Either way, the individual shareholder will still own US$2,750 worth of Alphabet shares.

According to its earning statement, Alphabet intends to split all 3 of its current share classes.

Class B shares aren't publicly traded and will still have 10 times the voting rights of class A and C shareholders.

What is the benefit for Alphabet?

A company will usually share split if they think the price of their shares are too high.

Basically, they are trying to increase the number of investors who find the price attractive to buy.

While fractional investing exists, many shareholders are taken aback by having to pay US$2,750 per share.

Instead, under this model, they can own a single share in Alphabet for US$137.

Another key benefit is it can help lift Alphabet's market cap.

Market cap – or market capitalisation – refers to the total value of a company's shares of stock.

With a market cap of US$1.8 trillion, Alphabet could cross US$2 trillion in total share price assets, should the company be able to attract new shareholders.

Will it impact the stock/ETF market?

Despite the massive change in Alphabet's price, stock splits don't tend to have a significant impact on markets over time.

Remember that the value of the company has not changed. In fact, all that has changed is the amount of pieces the revenue is divided into (number of shares).

Instead, the only way it will impact markets is if it sees a surge in buyer demand pushing its market cap significantly up, making it an even more dominant part of the market.

Is now a good time for investors to buy Alphabet?

Investors should continue to make their decisions based on Alphabet's long-term outlook.

For existing shareholders, it is important to note the only thing changing is the share price.

They will still just have more shares that are less valuable.

As such, it should be business as usual for current investors.

The advantage comes for smaller retail investors.

Instead of having to buy fractional shares, they could buy an entire 1 for less.

For these investors, 18 July could be a good time to buy Alphabet shares.

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