The mammoth technology conglomerate announced that it will execute a 20-for-1 stock split after the company’s stock doubled over the last two years.
That means for every share of stock you owned at the close of business July 1, Alphabet will issue you another 19 shares on July 15. And of course, the stock price will be cut accordingly.
The split will be effective for all three class of shares: the Class A shares that trade on the Nasdaq exchange under the GOOGL ticker symbol, the Class B shares held by founders and early investors and are not publicly traded, and the Class C shares that trade under the GOOG symbol and have no voting rights.
What does this mean for investors (and potential investors)? Well, there’s plenty of history to indicate that the upcoming split makes GOOGL stock a buy.
Split Makes GOOGL Stock More Accessible
After Alphabet executes its stock split, it will be a lot easier for a retail investor to buy GOOGL stock. For instance, if Alphabet shares trade at current levels of $2,610 before the split, they’ll be at about $130 afterward.
Why is that important?
Retail investors — people that operate their own investment accounts, research stocks and make their own decisions — really flourished during the Covid-19 pandemic. Flooded with economic stimulus dollars and stuck at home during government-ordered shutdowns, many people turned to stock trading to make money and for a little entertainment.
But some not all platforms give investors the ability to buy fractional shares of a company — something that’s really important when you’re looking at opening a position in a company that’s a few hundred dollars a share.
And then there’s the issue of options. In many places, you’d have to have enough cash to purchase full shares of a stock when doing something like put options. It makes it a lot harder to sell puts on GOOGL stock when it’s at $2,610 per share.
“The reason for the split is to make our shares more accessible,” Alphabet CFO Ruth Porat said. “We thought it make sense to do so.”
More people jumping into GOOGL stock because it’s more affordable means the price has a better chance of advancing higher.
History’s on Your Side
Two of the more memorable stock splits in recent years are also in the tech sector — Tesla (NASDAQ:TSLA) did a 5-for-1 split in August 2020, and Apple (NASDAQ:AAPL) successfully did a 3-for-1 split at the same time.
In fact, Apple has executed a total of five stock splits, meaning if you had a 100 shares of AAPL when it first went public, you’d have 22,400 shares of AAPL today. That’s a great way to add value to your portfolio.
Both Apple and Tesla had big runs after their splits — AAPL is up more than 23%, and Tesla rose more than 90% following its split.
David Ikenberry of Rice University conducted two studies of stock performance after a split. He concluded that shares of split stocks, on average, outperform the market by 8% in the first year after the split, and by 12% in the second year.
The Dow Looms Large
The Dow Jones Industrial Average is one of the most important and well-known barometers for the health of the stock market. It’s been around for more than 125 years, includes 30 of the best-known companies on Wall Street.
So, would it surprise you that Alphabet, with a market capitalization of $1.7 trillion, isn’t included in the gauge?
That’s because the DJIA is a price-weighted index, rather than based on market capitalizations. When a company like Alphabet lets its stock get up to $2,600 like it is today, it’s impossible to consider it for the Dow because its price would simply overwhelm other components.
Notable, Apple was the last big tech company to join the Dow. And it did so seven months after completing a 7-for-1 stock split in 2015.
The Bottom Line
I liked GOOGL stock as an investment even before the company announced a stock split. But now that shares are going to be at a much more reasonable level for retail investors — and the Dow — I’m expecting big things from Alphabet.
On the date of publication, Patrick Sanders was long TSLA stock. He did not have (either directly or indirectly) any other positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.