Should you buy Alphabet before the stock split?
During Alphabetit is ( GOOG 1.56% ) ( GOOGLE 1.84% ) fourth quarter and full year 2021 earnings call On February 1, the company announced that its board of directors had approved a 20-to-1 stock split, effective July 15. Alphabet is just one of many big tech companies to announce spin-off shares in recent years. In 2020, FAANG leading Apple (AAPL 1.97% ) proceeded with a stock split, as did You’re here (TSLA 2.91% ). In 2021, semiconductor pioneer Nvidia (NVDA 3.02% ) completed a stock split, and recently the two Amazon and Shopify announced stock splits for later this year.
If you’re one of the many investors considering buying Alphabet shares right now, the announced split raises the question of when to make the purchase. Let’s take a look and see if Alphabet is worth an investment now, before the split, or if waiting until after the split better suits your investment profile.
It might be worth taking a look at the big tech counterparts
Stock splits are generally not intended to change the market value of a company. On the contrary, when a stock split takes place, the number of shares outstanding increased by a predetermined multiple. Thereafter, the share price decreases in proportion to this ratio so that the overall value of the company does not change.
But while intrinsic value doesn’t change, sometimes emotion can trump logic in capital markets, causing stock prices to rise. before a stock split occurs. Some investors will choose to buy a stock before the split, hoping that after the split takes effect and the shares look cheaper, more investors will buy the stock, thus increasing the share price in a short time. Essentially, these investors are riding momentum with the goal of generating a short-term profit. While this trading strategy has merit for certain types of investors, let’s look at some examples of why buying before a split and holding through the split event may be more profitable in the long run.
As Mark Twain would have said, “history does not repeat itself, but it often rhymes”. When it comes to recent stock splits, more often than not, investors have experienced similar paradigms in trading activity.
Apple completed a stock split on August 31, 2020. On a split-adjusted basis, Apple stock closed at approximately $129 per share post-split. About a month later, the stock price had decreases down 10%, closing around $116. However, if an investor had held the stock, they would have enjoyed a 28% return, as Apple’s current stock price is around $166 per share.
Similarly, Tesla completed a stock split on the same day as Apple in 2020. On an adjusted basis, Tesla stock closed around $498 per share after the split. About a month later, shares of Tesla were down 14%, closing around $429 per share. Just like with Apple, if investors had held Tesla shares throughout the short-term volatility and dynamic trading, they would have earned a 96% return, as Tesla now trades at around $975 per share.
Then there’s Nvidia, which completed a stock split in July 2021. On an adjusted basis, the company’s shares closed at $186 per share post-split. About a month later, Nvidia stock was up 12%, to $208 per share. But if you had held the stock until today, you would have an 18% return, as the stock is currently trading at $219 per share.
The general theme of all of these examples is that the stock price has generally risen over the long term and has shown resilience even with dynamic short-term traders buying and selling stocks during these pivotal events.
Impressive profitable growth
For the fiscal year ended Dec. 31, 2021, Alphabet generated $257.6 billion in revenue, up 41% from 2020. The company recorded impressive growth across all of its business segments, both in terms of revenue and operating profit. Alphabet’s total operating profit was $78.7 billion in 2021, up a staggering 91%. Those operating profits had a direct impact on the company’s cash flow, and Alphabet wasted no time deploying those profits into future growth engines.
So far in 2022, Alphabet has announced two significant acquisitions, both in the area of cloud cybersecurity. More recently, the company announced its plan to acquire Beggar for $5.4 billion. The deal is particularly exciting because the company said Mandiant’s products and services will be integrated with Alphabet’s existing cloud offering, Google Cloud Platform. In 2021, Google Cloud generated $19.2 billion in revenue, but it remains unprofitable as that division lost nearly $3.1 billion.
Investors should be encouraged that Alphabet’s management has identified and is actively pursuing future growth catalysts that can be integrated into existing business segments. As investments in digital transformation, and the cloud market more broadly, begin to take shape, Alphabet is well positioned to capitalize on these tailwinds and grow an already impressive business to even greater heights.
Identify your investor profile
It is important to remember the time spent in the market is more important than specifically trying time the market. When it comes to stock splits, there are many different strategies that can lead to lucrative profits depending on how you invest. We can see that investors who held stocks in large Alphabet tech cohorts generally performed better over the long term compared to investors with short holding times.
Between impressive revenue growth, expanding profit margins and strategic investments in a future growth catalyst, Alphabet has given investors several reasons to buy the stock now, before the split, instead of waiting. after stock looks cheaper but is basically the same.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.