Alphabet, the parent company of Google, revealed its December-quarter earnings and sales, which exceeded analysts’ expectations and announced a 20-for-1 stock split, sending Google stock soaring in early Wednesday trading. Following the news, Alphabet’s stock jumped more than 9% in after-market trade.
The move comes a year and a half after Apple divided its stock, giving shareholders three shares for every share they owned. Due to investors ‘ preference for profitable expansion, alphabet and Apple are currently two of the few technology businesses with market capitalizations in the trillions.
Alphabet shares are divided into three categories: Class A, Class B, and Class C. In 2012, Google introduced a third share class, Class C, with no voting rights. The corporation previously had Class A shares, which have one vote per share, and Class B shares, which have ten votes and are held by the company’s founders and early investors. Through its 2015 rebrand to Alphabet, the business maintained this stock structure, which was supposed to make buying shares more inexpensive.
In a conference call with television anchors, Alphabet’s chief financial officer, Ruth Porat said, “The reason for the split is it makes our shares more accessible.” “We thought it was a good idea.”
So what exactly is a stock split?
Simply put, a stock split occurs when a corporation divides its shares to lower the price while increasing the total number of shares available. When the price of a company’s shares has risen too high, it usually goes through a stock split.
If a $1,000-per-share corporation had a 2-for-1 stock split, the total number of shares would double, but each share’s price would fall to $500. An investor who holds 100 shares in this imaginary business would own 200 shares instead of 100.
A lower stock price makes it easier for ‘mom-and-pop’ traders to acquire shares rather than fractional stocks through their brokerage firms. Based on Tuesday’s closing price of $2,752.88, Alphabet’s 20-for-1 split would lower the price of Class A shares to around $138. Since 2005, a share in the corporation hasn’t been so cheap.
“Institutional investors may buy in bulk, and the price per share doesn’t matter,” said Ed Clissold, Ned Davis Research’s chief US strategist. “However, a reduced price-per-share makes it easier for a smaller investor to purchase.” In a report, Bank of America analyst Justin Post stated, “We expect lower beats in 2022 as search growth slows and operations expenses rise.”
“However, in comparison to peers, Alphabet has more earnings stability, more potential exposure to an ongoing rebound in the local and travel verticals, evidence of artificial intelligence advantages across the product stack, and a management team that is doing more for shareholders (buybacks and now stock splits),” he continued.
Revenue from online search advertising exceeded forecasts in the fourth quarter. However, Google’s cloud computing unit and YouTube ad revenue both fell short of expectations. In the fourth quarter, the business spent $13.5 billion on stock repurchases, up from $12.6 billion in the previous quarter.
Larry Page and Sergey Brin, Google’s founders, highlighted that they would always operate “with the long-term welfare of our company and stockholders in mind” in a letter that included the 2004 prospectus for Google’s initial public offering. They dubbed the third class’s adoption “essentially a stock split” and stated that many shareholders had been asking for it. Before the change to Alphabet, there was a 2-for-1 stock split in 2014.
According to FactSet, Page and Brin own a combined 12% of Alphabet’s Class C shares, which trade under the name “GOOG” and have no voting rights. The two own 83% of the company’s Class B shares, which aren’t traded publicly.
Alphabet stock has recently gotten more costly, with shares trading at nearly $2,750 after the market closing on Tuesday, doubling in value since May 2020. Because of the lower price, more investors may be able to purchase complete shares of the advertising firm rather than fractional shares.
Share splits have almost vanished from US stock markets in recent years, with only two splits in 2019, compared to 47 splits in the S&P 500 between 2006 and 2007. However, after splitting their equities in 2020, Apple Inc. and Tesla Inc. brought it back to the forefront.
The possibility of a split has long been speculated regarding the digital store. With a stock price of $3,023.87 on Tuesday, the e-commerce behemoth is one of just seven businesses in the S&P 500 that trade for more than $1,000, and it is by far the largest, excluding Alphabet.
According to Morgan Stanley analyst Brian Nowak, Alphabet’s “increased shareholder friendliness” now pressures Amazon to consider buybacks and a stock split. In the last three years, Amazon has divided its stock three times.
When will the stock split occur?
Alphabet stockholders will receive their extra shares on Friday, July 15, pending shareholder approval. When markets reopen on July 18, Alphabet will begin trading at its new price.