Neither the bear market nor the stock split will have a lasting effect on this company’s long-term potential.
Amazon‘s stock split has officially taken effect, but there’s still time to grab shares in another trillion-dollar giant before it conducts one of its own. Alphabet (GOOG -2.05%)(GOOGL -2.19%), the parent company of Google, has officially scheduled July 15 as the day it shrinks its stock price using a 20-for-1 split.
On that date, the number of Alphabet shares in circulation will increase by 20 times, which in turn will bring down the price per share. If the split occurred today, for example, Alphabet’s current stock price of $2,342 would fall to just $117.10. It’s important to note, however, that stock splits don’t actually change the intrinsic value of the business — the move is purely cosmetic.
But it might encourage smaller investors to buy Alphabet stock since the price of a single share would be more affordable, and that could offer a lift to the company’s overall value. It’s no guarantee, but it would be a net positive since Alphabet’s stock price has declined almost 22% from its all-time high amid the bear market in the technology sector.
Split or not, it’s a fantastic company
Alphabet has a market valuation of $1.5 trillion as of this writing, and its success is attributable to its diverse set of businesses. That’s why it’s important to set aside short-term factors like the incoming stock split and instead focus on the company’s core operations, because that’s what really matters.
Most people interact with Alphabet through Google, which owns about 92% of global search engine market share and is the driver of the company’s advertising revenue. But Google has expanded beyond that flagship asset and now also lends its name to a suite of products and services that includes email, digital documents, cloud computing, a smartphone, and even a doorbell camera.
But this powerhouse company isn’t driven by one brand alone. In 2006, Alphabet (when it was still just “Google”) purchased the online video platform YouTube for $1.65 billion, and to call it a success would be an understatement. Today, 2.6 billion people use the platform every month, and in the first quarter of 2022 alone, YouTube generated over $6.8 billion in advertising revenue, which is multiples higher than the original acquisition price almost 16 years ago.
But Google Cloud might be Alphabet’s most intriguing segment. The cloud, which helps companies migrate their operations online with hundreds of services from data storage to artificial intelligence tools, could be a $1.5 trillion opportunity annually by 2030, according to some estimates. And right now, Google Cloud is comfortably outgrowing the rest of Alphabet with a revenue jump of 43% in first-quarter 2022, compared to just 23% for the company overall.
Alphabet is a profit-generating machine
The pandemic created the perfect environment for companies that rely on screen time. A combination of lockdowns and work-from-home trends meant people were spending more of their days online, creating a boom for digital advertising.
For that reason, Alphabet experienced its most profitable year ever in 2021. But the company is facing the risk of a slight drop in earnings per share this year as the pandemic effects continue to fade. Outside of the broader market turmoil, this is part of the reason Alphabet stock has fallen almost 22% from its all-time high.
But there’s good news for investors who are brave enough to buy the dip: Analysts expect Alphabet’s earnings will make a strong recovery in 2023, which will hopefully be buoyed by a more certain economic environment.
After July 15, investors should divide Alphabet’s earnings per share figures by 20 in order to adjust them for the stock split.
Why you might regret not buying Alphabet stock
The broader market has taken a hit because rising interest rates and geopolitical tensions have forced investors to reconsider their growth expectations for technology stocks in particular. In such an environment, owning shares in profitable companies can help to reduce the risk of losses. While Alphabet stock has fallen roughly in line with the Nasdaq 100 tech index, many high-flying companies have lost 50% or more of their value during the same period.
Put simply, if the market does get worse, Alphabet stock is a great place to be. And if conditions improve, investors own a slice of a diverse company that can directly benefit from renewed strength in the economy thanks to its overwhelming exposure to advertising spending.
But given the 22% dip in its stock price, this might be an opportunity to buy in and hold for the ultra-long term, regardless of what happens in the next year or two — stock split included.
