Shares of Google parent company Alphabet (NASDAQ:GOOGL) are about to get a lot more affordable. On July 15, GOOGL shares will split on a 20-for-1 basis. It will be the first time the Mountain View, California-based technology giant has split its stocks since 2014, shortly before the company rebranded itself as “Alphabet” to reflect its increasing expansion beyond its online search engine.
Already down 19% year to date, the upcoming stock split would take Alphabet’s share price to $113.89 based on its current level of $2,277.84 a share. While the split doesn’t change the underlying fundamentals at the company, it will make shares in the company much easier to acquire, particularly for individual retail investors.
And that could be the catalyst that shakes Alphabet stock out of its current funk and leads to the share price moving higher.
| GOOGL | Alphabet | $2,277.84 |
Misleading Results
Stock split aside, there remain a lot of reasons to be bullish on GOOGL stock. The company continues to excel in all areas of its business — from its signature ad-supported Google search engine and cloud computing, to its Pixel smartphones and “other bets” unit that includes self-driving cars.
To be sure, the company reported first-quarter earnings that missed Wall Street expectations, sending its stock lower. But on close inspection, Alphabet’s Q1 print was not that bad and mostly due to a decline in advertising revenue for its YouTube channel. Investors who read the earnings headlines would miss the fact that Alphabet continues to grow in several important areas.
Although, Alphabet’s first quarter revenue of $68.01 billion missed analyst forecasts of $68.11 billion, it still grew 23% from the same period a year earlier. The company’s advertising revenue for the quarter came in at $54.66 billion, up 18% from $44.68 billion in Q1 2021.
And revenue for the Google Cloud segment, which is widely seen as a key area of future growth for the company, came in at $5.82 billion, which was up 44% from a year ago and better than the $5.76 billion that had been expected on the Street.
Had it not been for a downturn in advertising revenue on YouTube, which has slowed as the pandemic fades and people spend less time amusing themselves online, Alphabet would have beaten analysts expectations for its first quarter earnings.
Low Valuation
Alphabet’s stock split not only comes with is share price knocked lower this year, but with the company’s valuation near historic lows. Alphabet’s shares currently trade at 20 times expected earnings, which is among the lowest levels in the company’s 18-year history as a public company.
By comparison, Amazon (NASDAQ:AMZN), which is also splitting its stock on a 20-for-1 basis, is trading at 47 times expected earnings, more than double Alphabet’s level. Analysts by and large agree that GOOGL stock is undervalued at current levels.
The median price target on the stock among 45 analysts who cover the company is 40% higher than where it currently trades. The shares only recently bounced off a 52-week low of $2,037.69 a share.
Another reason for investors to be excited about Alphabet’s upcoming stock split is that it could make GOOGL stock eligible to join the Dow Jones Industrial Average, a price-weighted index of 30 prominent blue-chip companies.
Being added to the Dow could lead to increased buying of Alphabet’s stock as exchange traded funds (ETFs) and mutual funds that track the index would need to purchase the company’s shares. Buying among retail investors should also spike.
At its current price above $2,000 a share, only about 1.7 million Alphabet shares change hands each day. That is a fraction of the average daily volume of 85 million shares of Apple (NASDAQ:AAPL) that are traded each day. After splitting in August 2020, AAPL stock currently trades at just under $150 per share.
Buy GOOGL Stock Once It Splits
Alphabet remains a leading technology company that is dominant in most areas in which it competes. Highly profitable with plenty of free cash flow, Alphabet is the type of mature mega-cap technology company that delivers solid returns to investors.
And while its share price has suffered this year amid the broad-based market selloff, the upcoming 20-for-1 stock split could prove to be the catalyst that’s needed. Given how cheap it currently is, investors should definitely plan to buy GOOGL stock once it splits and becomes more affordable.
On the date of publication, Joel Baglole held long positions in GOOGL and AAPL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
