Everyone’s raving about the upcoming Alphabet (GOOG, GOOGL) stock split, with many traders saying it’s a reason to buy GOOG stock. (Editor’s Note: Alphabet’s stock split applies to all share classes, not just GOOG.)
Now, to an extent, I agree with that thesis. Google stock is an excellent buy right now — but not because of the stock split.
Rather, it’s because Alphabet is a high-quality growth asset with excellent operating fundamentals. And the stock is materially undervalued relative to those fundamentals.
So, yes, buy GOOG stock. But don’t buy it for the stock split.
The reality is that stock splits are essentially par for the course when it comes to successful companies like Alphabet. A company usually goes public on Wall Street around $15 to $50 per share. If it succeeds, its stock price goes up. Eventually, for very successful companies, that $15 to $50 becomes a $1,000-plus stock price.
Up at those levels, stocks have been considered prohibitively expensive for retail investors. So, to democratize access, companies execute stock splits. This brings the share price back down , and then they run the cycle all over again.
It happens all the time, and it’s rarely a big deal.
Sure, stock splits are usually votes of confidence from management about the state of the company. Execs like big stock prices. It’s like being an NBA player that averages more than 20 points per game — it’s bragging rights. So, execs wouldn’t approve a stock split unless they had faith the stock could regain its highs on a per-share basis.
And most management teams do believe in their companies. (If they don’t, that’s a major problem.) Therefore, when it comes to stock splits, I view them across the board as “barely bullish.” They’re good for the stock but hardly game-changing. And assuredly, they’re not a reason in and of itself to buy a stock.
Fantastic Underlying Fundamentals
With respect to GOOG stock, there’s a lot more than a stock split going for the company.
The digital ad business is on solid footing. And while digital advertising is set to fall in 2022/23 amid slowing economic activity and consumer spending, digital search advertising — Google’s bread and butter — is traditionally the most resilient digital advertising vertical. Search ad budgets won’t get cut much, if at all.
Instead, all those dollars being spent on social media channels will likely migrate to search. Google’s ad business could win market share over the next 12 months. That will offset slowing ad spend and power still-healthy 10%-plus growth in that business.
Meanwhile, Google Cloud continues to be one of three behemoths in the secular growth public cloud infrastructure industry. That industry won’t slow because of a recession. Companies will keep spending big on cloud infrastructure until the apocalypse. It’s that important to sustaining business operations. Therefore, this business, too, feels recession-resilient to us.
Now, its hardware business will struggle in the near term. But we’re very excited about the company’s recent breakthroughs in voice AI. And we believe it lays the technological foundation for Alphabet to become a consumer hardware giant one day with top-tier voice-assistant gadgets, like speakers, phones, even cars.
Indeed, on the car front, Alphabet’s self-driving division, Waymo, has had some setbacks recently with its San Francisco ride-sharing operations. However, our sources indicate that it continues to make great progress forward in self-driving. And it remains one of two “top dogs” in this space — the other being Aurora (AUR).
The Final Word on the GOOG Stock Split
Overall, the fundamentals underlying GOOG stock are very healthy. They imply that this is a company that should be largely recession-resilient and sustain mid-teens revenue growth over the next several years. That’s great growth potential. Yet, the stock is trading at just 20X trailing earnings, which is its lowest valuation multiple since 2012. And it’s markedly below the stock’s five-year-average P/E multiple of 30X. Alphabet stock is also trading at just 15X cash flow and 21X free cash.
In other words, with GOOG stock, you have a high-quality growth asset with lots of downside protection through its various recession-proof businesses and lots of upside potential due to its discounted valuation.
We like that combination. So, go ahead and buy GOOG/GOOGL stock — but don’t do it for the stock split.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
