Earlier this year, Google parent company Alphabet (GOOGL 0.08%) (GOOG 0.12%) announced plans to conduct a 20-for-1 stock split. It officially took effect at the market close on Friday, and today is the first day of trading with its new, shrunken share price.
When a company creates a lot of value over the long term, its share price typically generates high returns. In Alphabet’s case, its stock had risen to $2,235.55, which made it a little expensive for investors who were only investing small amounts of money.
What Alphabet’s stock split is, and what it isn’t
When a stock split occurs, the number of shares in circulation for a given company gets adjusted, which in turn changes its stock price. In Alphabet’s case, its 20-for-1 split means each existing investor will now have 20 shares for each one they previously owned, which has shrunk the price of each share down from $2,235.55 to $111.77. The dollar value of their position stays exactly the same.
This is a more enticing proposition for smaller investors because they no longer need to fork out thousands of dollars to buy a single share of Alphabet.
The stock split is entirely cosmetic and has no impact on the intrinsic value of the company, but it does require a small change to the way Alphabet’s earnings per share is calculated. Since there are now 20 times more Alphabet shares in circulation, all of the company’s past earnings per share numbers need to be divided by 20 to accommodate.
For example, Alphabet has generated $74.5 billion in net income (profit) over the last four quarters, which translated to $110.56 in earnings per share before the split. But now that figure needs to be divided by 20, so it becomes $5.53 in earnings per share. This only relates to Alphabet’s past earnings results; in future reports, the company will make the adjustment.
Buy the company, not the stock split
Stock splits have captured headlines throughout 2022, not just in relation to Alphabet, but also a handful of other big-tech companies. However, investors should always remember that a company’s fundamentals are the only thing that can create value and drive a stock price higher in the long run.
Alphabet is one of the most solid tech organizations in the world mainly thanks to Google, its flagship brand. Google has a 91% market share in the internet search industry, which makes it very difficult to disrupt — and many competitors have tried, including Microsoft, yet that company’s Bing search engine has only mustered a 3% global share.
Google Search has accounted for 58% of Alphabet’s $270.3 billion in total revenue over the last four quarters, so it’s also the financial engine of the company. But Alphabet has grown to become incredibly diverse, so it receives notable contributions from its other business units, too. The company has a growing hardware segment which produces the Pixel smartphone, the Pixel Buds headphones, and the Nest line of home devices — to name just a few products.
Alphabet also owns the world-leading YouTube video platform, which has generated $29.7 billion in ad revenue over the past year and boasts about 2 billion monthly active users. Considering Google bought YouTube for just $1.65 billion in 2006, it’s safe to say the bet has paid off. Its best results might still be ahead as its YouTube Shorts format is proving a worthy competitor to ByteDance‘s TikTok, already matching it for users despite launching just two years ago.
Alphabet stock is a great value
The stock market is having a rough year, but the technology sector is particularly weak. The Nasdaq-100 tech index is down 26.5% year to date, which places it firmly in a bear market. As a result, Alphabet stock has lost about 21% from its all-time high — and that might be a dip worth buying.
Investors are concerned about high inflation and rising interest rates, which could dampen consumer spending and slow the economy down. Since the bulk of Alphabet’s business relies on advertising revenue, it could feel the pinch if these conditions persist or grow worse. But there might be some good news on the horizon because these pressures are now showing early signs of easing.
With $5.53 in earnings per share over the last four quarters and a current share price of $111.77, Alphabet trades at a price-to-earnings multiple of 20.2. That’s 18% cheaper than the Nasdaq-100 index, which sits at a multiple of 24.7 right now; given the diversity of Alphabet’s business, that spells opportunity.
The company has a track record of success and remains a leader in innovation. It’s a great stock to own now and even more so if the economy rebounds, and thanks to the stock split, smaller investors now have a chance to get involved.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), and Microsoft. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.