Google‘s parent company Alphabet (GOOGL) stunned markets in early February by announcing a 20-for-1 stock split for July 2022, making shares drastically more affordable for retail investors. For a company that has split its unorthodox equity structure before, let‘s unpack why this move matters for shareholders seeking to tap into the tech giant‘s unparalleled growth.
As a long-time technology analyst who has covered Google since its fiery early days, I’ve learnt never to underestimate this trailblazing innovator. Even the Covid-induced tech rout hasn’t dampened my bullish outlook on Alphabet. Its ubiquitous products and services have become such an integral part of our daily lives that betting against Google is foolhardy.
This latest split reflects management’s masterstroke to double down on retail investors amidst the current market turmoil. So should you buy GOOGL stock after the split? What does the future hold for Google shares? Let‘s find out.
A Quick Primer: How Stock Splits Work
Before analyzing the nitty-gritties of Alphabet‘s split, let me walk through how stock splits work conceptually for the uninitiated.
A stock split refers to splitting existing shares into more shares, while adjusting the price lower in the same proportion. Imagine you own 1 share worth $100. If the company instituted a 2-for-1 split, you would hold 2 shares priced at $50 each. Your total value still equals $100 but gets chopped into smaller slices to create more affordable units per share.
Most companies split stocks to make their high-priced shares appear more accessible to small, everyday investors. Higher affordability yields higher demand as ownership gets broadened. It‘s a crafty strategy to mark milestone moments, regain lost investor interest or realign valuations closer to perceived intrinsic value.
Why $2,000+ per Share Was Too Expensive for Google Buyers
After surging 90% in 2020’s frenzied pandemic-led rally followed by another 65% gain in 2021, Google stock entered 2022 trading at dizzying heights north of $3,000.
But once 2022’s aggressive rate hikes sparked a mass tech sell-off, shares began sliding over 25% from all-time highs by mid-June. Trading at above $2,200 apiece, analysts maintained lofty 12-month price targets between $3,200 to $3,500 per share.
- But spending over $2,000 for a single share still seemed outrageous for most retail investors.
In fact, retail crowd ownership of Google stock sat at just around 9.4% in mid-2022. A high 95% of GOOGL shares were held by institutions like Vanguard, BlackRock and investment banks.
Compare this miniscule retail base to Apple’s (AAPL) 43% or Amazon’s (AMZN) 50+% retail ownership enjoying the share price surge over the past decade.
No points for guessing why affordable sub-$100 share prices have been fundamental in driving this retail frenzy!
Dropping Google‘s stock price through a split could rapidly accelerate retail interest and buying activity. More on whether this strategy is already bearing fruit later.
Inside Google‘s Strange Multi-Class Share History
To fully grasp the lead-up to today’s 20-for-1 split, it‘s important to understand the evolution behind Alphabet‘s unorthodox equity structure over the years.
You see, Google has 3 classes of outstanding shares:
Class A Shares (GOOGL): Most widely held publically traded shares with 1 vote per share
Class B Shares: Primarily owned by insiders like founders Larry Page and Sergey Brin with 10 votes per share
Class C Shares: Created in 2014 with zero voting rights
- This multi-class format aimed to allow Page, Brin and executive chairman Eric Schmidt to cement their voting grip over corporate decisions while still issuing stock to raise public capital.
Back in 2014, investors felt Class A shares had lost their mojo with prices stagnating below $600 for over 2 years since 2012.
So Alphabet rolled out its first improvised stock split by introducing the new zero-voting Class C shares.
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For every 1 share held of the original Class A stock (then trading at $550), investors received 1 additional Class C share.
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Essentially each A share sliced into 2 pieces — the original A share now worth $276 and a new non-voting C share worth $276.
This instantly brought Google‘s stock price under the $300-mark without threatening insider voting superiority. Valuations realigned closer towards growth-driven reality.
Soon the undisrupted innovation blitz kicked growth into overdrive. Both classes eventually breached the $1,000-level by 2017 itself before reaching today’s $2,000+ prices.
How The 2022 Stock Split Unfolded
Despite strong fundamentals, Google shares looked technically overbought trading above the $3,000 mark in late 2021.
As the Fed’s hawkish rate policy fueled the massive tech sell-off from late 2021 through mid-2022, Google stock slid nearly 30% to settle around $2,200.
But with valuations looking attractive after the pullback yet prices still inaccessible for retail buyers, Alphabet dropped the latest split announcement as a surprise catalyst.
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On July 15th 2022, Google‘s Class A shares closed at $2,235 while Class C shares shut shop at $2,250 apiece.
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When trading reopened on July 18th after the weekend, the company had issued an even 20-for-1 split across all classes of stock.
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So A & C classes opened at roughly $112 and $117 per share respectively — nearly 1/20th the closing price on July 15th.
For all current shareholders, the overnight split mechanics were seamless — your number of shares held shot up 20x while prices dropped to 1/20th in lockstep.
If you held 50 shares earlier worth $100,000, you now held 1,000 shares worth the same $100,000. But instead of $2,000 each, your ownership got converted into 1,000 shares at $100 per piece!
Why Lower Prices Unlock a World of Potential Buyers
As investing guru Warren Buffet wisely said: “Price is what you pay, value is what you get.”
While intrinsic value relies on concrete financial metrics like revenues, earnings, growth rates, price depends purely on supply-demand dynamics in the stock market.
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At over $2,000 per share, sheer inertia kept many retail investors on the sidelines.
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After all, even the most bullish individual would hesitate ponying up $10,000 or more to buy 5 shares.
Research revealed share ownership costs above $350 begin influencing buy decisions. Consider how these perceptual barriers get demolished when prices drop 95% overnight from $2,000+ to double-digit levels!
Suddenly even small solo investors can gobble up enough shares to feel their holdings make an impact. When prices seem within reach, under-represented individual investors get incentivized to participate.
No wonder Google saw massive spikes in retail buying activity immediately after its 20-for-1 split.
In the past, such widely broadened accessibility has allowed the Amazons and Apples of the world to reach market caps crossing $1 trillion.
Will the same hold true for Alphabet? Let’s crunch key numbers.
Fundamental & Quant Analysis Reveals Strong Value Post-Split
While optical price corrections allow smaller investors easier access, a company’s quantitative strengths and future outlook remain unchanged by cosmetic splits.
Thankfully Alphabet checks both boxes — poised at reasonable valuations after the stock slide yet gumming growth engines primed for the future.
Here’s a data-driven deep dive into fundamental and quant metrics that showcase Google’s convincing value-growth proposition for investors post-split:
Quarterly Performance Still Strong
Despite the mega sell-off, Google‘s latest Q2 2022 results show enduring business momentum:
- Total revenue up 13% annually to $69.7 billion
- EPS rose 2% year-over-year to $1.21 per share
- Operating income grew 6% annually to $19.5 billion
- Google Search and Cloud revenue both grew over 25%
- YouTube ads revenue up 4.8% securing $7.3 billion
- Healthy operating cash flow at $19.4 billion
Broadly speaking, Q2 results outperformed expectations with strength across advertising, cloud infrastructure, Google search and mobility trends nearly normalizing post-pandemic.
Profit Margins Still Juicy
Google‘s ability to convert revenue to actual profits ultimately fuels shareholder returns.
- Over the past 5 years, Google has recorded off-the-charts net profit margins averaging over 23% each year.
Yes, you read that right! For every $100 in revenue, Alphabet manages to pocket $23 in profit annually over the long-run.
That‘s over twice the net margins seen in other tech giants like Apple, Microsoft or Meta. Such thick profitability helps fund relentless innovation and future growth initiatives.
In 2022 so far, net margins remain above 20% despite economic instability. Powerhouse profitability seems likely to endure.
Reasonable Valuations After Stock Slide
Since valuation lies in the eyes of the beholder, let’s examine Google‘s current Price-to-Earnings ratio vis-a-vis historical averages.
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Today GOOGL stock trades at a forward P/E multiple of 17.4x compared to the 5-year average of 29.7x.
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The S&P 500 index mean over the same period equals 21.2x.
Trading at a 40% discount to past valuations and 20% lower than market benchmarks signals Google‘s attractive reset versus growth prospects.
Basically you pay far lower multiples per dollar of earnings than before while disruptive innovation remains unchanged. Feels like investors receive a valuation blowout sale just in time for the growth upswing!
Strong Forecasted Earnings Growth
If you had worries about Google‘s earnings outlook weakening, Wall Street estimates should qualitatively dismiss those fears:
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Consensus predicts target revenue to jump over 55% in 2022 and ~20% through 2025.
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Adjusted earnings per share likely to scale nearly 30% in 2022 and ~17% annualised through 2025.
For a company already generating over $250 billion in annual revenue, maintaining 15-20% top line growth reveals tremendous operating leverage still untapped.
This earnings momentum seems sufficient to reaccelerate share prices higher after the split discount.
Technical Price Charts Show Promising Setup
Technically speaking, Google‘s post-split stock reversal structured an encouraging base. After sharply sliding from all time highs above $3,000, GOOGL found buying support near $100 (equivalent to $2,000 pre-split) as seen below:
With strong fundamentals aligned to reasonable valuations, this technical bottom likely marks the turnaround point to restart its upward ascent.
Retail Investor Ownership Jumps Post-Split
Recall retail investors only owned 9% of total shares earlier at high prices. But once the split unleashed a horde of new buyers:
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Retail ownership almost doubled to over 17% by September 2022 per Capital.com data.
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TipRanks shows over 52% of individual portfolios now hold Google stock, up a whopping 9x!
Surging retail appetite directly fueled the rebound from under $100 towards post-split highs around $120. Powerful confirmation for the growth runway ahead.
Key Risks to Consider
Of course, no stock is risk-proof. With Google holding such dominant market share in digital ads, search, mobile and more, two looming risk factors deserve consideration:
1. Antitrust Regulation: Google faces antitrust lawsuit threats from U.S. regulators and abroad probing whether the tech king abuses its immense power. If forced to split/restructure main business segments, growth and profitability may suffer.
2. Advertising Slowdown: Over 80% of Alphabet‘s revenues still come via advertising channels. In a recessionary environment advertisers may dial back ad spend significantly denting Google‘s income stream near-term.
Still, strong diversification across its ad verticals (YouTube, Search, Display Network, Google Play etc.) should buffer any temporary impacts. The cloud segment also helps derisk reliance on ads alone.
Top Wall Street Analysts Overwhelmingly Bullish
Despite prudent risks involved, top-rated institutional analysts remain confident in Google‘s staying power:
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Per MarketBeat data, 28 out of 34 investment banks hail GOOGL stock as a ‘Buy‘ with zero sell ratings.
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The highest price forecast clocks $165 per share while the lowest still pegs GOOGL over $110.
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On average, top analysts predict 20% annual upside to $140 in 12 months despite unsteady markets.
Given the mega 20-for-1 split, these targets translate to well over $3,000 per share pre-split prices. Pretty eye-popping returns implying analysts expect the growth extravaganza to persist long-term.
Strategizing Your Google Stock Purchase
With the growth investment case looking clearly positive for GOOGL shares post-split, how should retail investors approach building a position?
Option 1 – Direct Stock Investment
For investors with enough risk appetite, dedicating $5,000 to $10,000 towards 30 to 60 shares of Google presents enticing upside potential. In a tax-advantaged retirement account, the direct stock route makes solid sense.
But refrain from allocating over 10% of your equity portfolio towards any single stock for adequate diversification.
Option 2 – The Mutual Fund Path
For those seeking less volatile exposure, mutual funds like Fidelity Growth Company (FDGRX) provide access to Google as a top-10 position blended with other high-growth tech names.
The fund route dilutes potential upside but cushions against concentration risk. It lets financial advisors handle all stock-picking and portfolio management complexities too.
Option 3 – Dollar-Cost Average Over 6 Months
Rather than deploying full capital upfront, dollar-cost averaging allows buyers to accumulate shares gradually.
Investing say $2,000 per month over 6 months equals nearly 50 shares by year-end. Slowly building a position helps hedge timing risks amid market uncertainty.
Final Verdict: A Generational Buying Opportunity
In summary, Grab Google shares with both hands after the historic stock split unlocking this tech juggernaut for retail investors.
The company remains poised years ahead of competition across search, cloud, AI, self-driving cars and digital advertising. Despite economic weakness plaguing 2022, Google still posted double-digit sales and earnings growth with minimal impact to its unstoppable long-term trajectory.
Meanwhile valuations appear compellingly cheap compared to historical multiples. Technically prices found a pivotal bottom near $100 (equivalent to $2,000 pre-split).
As billion-dollar corporate and institutional investors continue holding 95% of total shares, retail investors got handed a rare gift here.
Owning Google stock allows harnessing their world-class investing talent nearly free. Don‘t squander this opportune moment to claim shares likely to dominate technology for decades more!
