Google shares are about to get cheaper, and it’s a good sign for investors
Google could be headed for $2 trillion in market capitalization following a just-announced 20-for-1 stock split and strong earnings.
Google’s parent company Alphabet (GOOGL) could join the $2 trillion market cap club, after it announced a 20 for 1 split.
Shares of Alphabet surged almost 8% – rising to $2,970 – in after-hours trading following the announcement of stellar earnings in the fourth quarter.
The company also states it intends to issue a 20:1 stock split.
The tech giant earned $20.6 billion (or $30.69 per share), well above the average estimate of $28 per share.
Speaking on Alphabet’s strong growth, CEO Sundar Pichai stated the deep investment in AI technologies continues to drive extraordinary and helpful experiences for people and businesses.
“Q4 saw ongoing strong growth in our advertising business, which helped millions of businesses thrive and find new customers, a quarterly sales record for our Pixel phones despite supply constraints, and our Cloud business continuing to grow strongly,” Pichai said.
Despite the strong earnings, the biggest news for shareholders is actually the stock split.
This comes after fellow tech giants, including Apple (AAPL), Microsoft (MSFT) and Tesla (TSLA), have split their shares in order to make them more appealing to retail investors. Stock splits don’t directly affect shareholder value, but companies usually split when stock prices have risen and are expected to keep growing.
What is a share split?
Newer investors who have never seen a stock split before might be wondering what the company is actually doing.
When a share price gets higher, it becomes less liquid as investors have to pay more to buy in.
As such, in order to increase liquidity, a stock split occurs – meaning the existing shares are divided along with the price.
Put simply, a stock split is where 1 stock is divided into several stocks along with its share price.
Take, for example, the current split announced by Alphabet:
At 20:1, 1 stock in the company becomes 20, while the price of the stock is now one-twentieth its previous value.
What does this mean for investors?
Despite stock splits falling out of favor in recent times, Alphabet’s shareholders as of 1 July will receive 19 additional shares on 15 July for every share they hold.
However, this is not a free chance to cash in. The net value of the shares do not change.
Take an investor who owns one share in either Alphabet class A or C worth about $2,750.
After July 15, the shareholder will go from owning one share in Alphabet to owning 20, but the value of each individual share will fall to around $137.
The company will trade from the new price as of July 18.
Either way, the individual shareholder will still own $2,750 worth of Alphabet shares.
According to its earning statement, Alphabet intends to split all 3 of its current share classes.
Class B shares aren’t publicly traded and will still have 10 times the voting rights of class A and C shareholders.
What is the benefit for Alphabet?
A company will usually split a stock if they think the price of their shares are too high.
Basically, they are trying to increase the number of investors who find the price attractive to buy.
While fractional investing exists, many shareholders are taken aback by having to pay $2,750 per share. They feel priced out.
Instead, under this model, they can own a single share in Alphabet for $137.
Another key benefit is it can help lift Alphabet’s market cap.
Market cap — or market capitalization -– refers to the total value of a company’s shares of stock.
With a market cap of $1.8 trillion, Alphabet could cross $2 trillion in total share price assets, should the company be able keep attracting new shareholders and delivering good results.
Only two companies in the US market, Apple (APPL) and Microsoft (MSFT) currently have market caps over $2 trillion. Apple topped $3 trillion last month but has slipped back.
Will it impact the stock/ETF market?
Despite the massive change in Alphabet’s price, stock splits don’t tend to have a specific impact on a stock’s value over time.
Remember that the value of the company has not changed. In fact, all that has changed is the amount of pieces the revenue is divided into (number of shares).
The only way it will impact markets is if it causes a surge in buyer demand pushing its market cap significantly up, making it an even more dominant part of the market.
Is now a good time for investors to buy Alphabet?
Investors should continue to make their decisions based on Alphabet’s long-term outlook.
For existing shareholders, it is important to note the only thing changing is the stock price.
They will still just have more shares that are less valuable.
As such, it should be business as usual for current investors.
The advantage comes for smaller retail investors.
Instead of having to buy fractional shares, they could buy an entire share for less.
For these investors, 18 July could be a good time to buy Alphabet shares.
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