The Cheap Trick Alphabet Is Using To Boost Its Share Price

The Cheap Trick Alphabet Is Using To Boost Its Share Price
Andrew Rummer

about 2 years ago5 mins

  • Alphabet’s decision to split its stock 20-for-1 won’t have any fundamental impact on the company or the value of its stock.

  • But it could encourage smaller investors to take more interest in Alphabet’s governance and strategy.

  • And similar splits have proven a positive sign for other tech stocks over the past couple of years.

Alphabet’s decision to split its stock 20-for-1 won’t have any fundamental impact on the company or the value of its stock.

But it could encourage smaller investors to take more interest in Alphabet’s governance and strategy.

And similar splits have proven a positive sign for other tech stocks over the past couple of years.

Mentioned in story

Alphabet, the parent company of Google, announced a whopper 20-for-1 stock split on Tuesday along with blowout fourth-quarter results. And while in theory the move changes nothing if you’re an investor of the company, in practice the truth is slightly more complicated.

What’s going on?

The share split means that anyone holding Alphabet stock on July 1st will, two weeks later, receive an additional 19 shares for every one they own. Each new share will, however, be worth 20 times less than the old ones, and Alphabet itself won’t be worth any more or less: its nearly $2 trillion market value will just be spread across more shares. Were the split to be enacted today, each $2,960 share would be divided into 20 shares worth $148 each.

Such splits used to be common, with as many as 47 at S&P 500 companies in 2006 and 2007. But the growth of brokerages offering so-called fractional ownership – the ability to buy a small slice of one share – removed much of the impetus. Pulling up a trading app on my phone today, I can easily put in an order for a mere £10 worth of Alphabet stock, netting me 0.005 of a share. 

Apple and Tesla brought stock splits back to investor attention in 2020, followed by Nvidia in 2021. But while those firms split a single stock into four or five parts, Alphabet’s 20-for-1 split is even more dramatic (although if we were running Alphabet we’d have plumped for an on-brand 26-for-1 split – one for every letter of the, um, alphabet). 

The split is Alphabet’s first since 2014, when it gave investors one additional share for each one they owned in a 2-for-1 split. Alphabet has three classes of stock, and the 20-for-1 split will affect all three in the same way:

  • Class A stock (ticker: GOOGL) is the classic “common” stock, where one share gives you one vote over company policy.
  • Class B stock is just for the company’s founders and allows them 10 times the voting rights per share, giving them effective control of the company. Class B stock doesn’t trade publicly.
  • Class C stock (ticker: GOOG) is like the Class A, but doesn't have any voting rights attached. Despite this, the Class C stock has – a little strangely – traded at a slight premium over the Class A stock over the past couple of years.

Why is Alphabet doing this?

Alphabet’s CFO says, simply, that, “it makes our shares more accessible.” And there’s no harm in making it 20 times easier for an investor to buy a single share in your company, or indeed a nice round number of shares.

Of course, such a split doesn’t actually change a company’s fundamental valuation metrics – i.e. what it’s worth relative to its earnings potential. But because full shares – unlike fractional shares – offer the right to vote on company policies, Alphabet might be hoping to win greater engagement from its smaller investors. A cheering fanbase of retail traders has certainly helped firms like GameStop and AMC Entertainment recently.  

​Another motivation might be gaining entry to the Dow Jones Industrial Average, the grande dame of US stock market indexes. The Dow employs an antiquated weighting method whereby a company’s size in the index is dictated by its absolute share price rather than its overall market value (it made the math easier when it started over 100 years ago). But at nearly $3,000 a share, Alphabet has been barred from the Dow, lest its addition swamp the index’s 29 other stocks. If it can win approval post-split, Alphabet – the third-biggest stock in the S&P 500 – will get a small uplift from the billions of dollars in exchange traded funds (ETFs) tracking the Dow.

What does it mean for Alphabet’s share price?

Investors initially welcomed the split announcement with open arms, sending Alphabet stock up 8% on Wednesday (it was accompanied by fourth-quarter earnings that breezed past expectations, mind you).

And a look at how shares in rival tech giants Apple, Tesla, and Nvidia have performed since enacting similar splits helps you understand why. Apple is up 81% since it unveiled its share-split plans in July 2020, Tesla has more than tripled since it published its own plan the following month, and Nvidia has climbed 65% since its May 2021 announcement. 

Apple’s share price since it split its stock
Apple’s share price since it split its stock
Tesla’s share price since it split its stock
Tesla’s share price since it split its stock
Nvidia’s share price since it split its stock
Nvidia’s share price since it split its stock

But as we mentioned earlier, nothing about a stock split fundamentally alters the financial underpinnings of a company’s stock. So what else is going on here? 

Well, a share split is in many ways the ultimate sign of management confidence – misplaced or otherwise. 

By definition, only successful firms that have posted impressive stock price growth even need to consider splitting their shares. And managers will only go through the hassle if they think their company’s stock will keep growing in future. No company wants to face the ignominy of finding their stock price too low, forcing a share consolidation (a.k.a. a reverse split) before it hits the ranks of unloved penny stocks.

All that said, Alphabet might not find it as easy to replicate the success that has come to Apple, Tesla, and Nvidia following their splits – at least in the short term. It’s quite possible the environment over the next few years won’t be as conducive to big gains in tech stocks, if central banks are forced to raise interest rates to head off inflation.

And while Alphabet’s announcement has been and gone by now, those who believe in the power of share splits to deliver a share price boost might want to look to another tech firm to profit: Amazon, now the only US tech giant left with a four-digit share price. I wouldn’t be surprised if the ecommerce firm decides to trim its own $3,000 share price down to size before too long – potentially giving its stock a nice bump in the process. 

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