For years, many retail investors weren’t able to get involved with tech giant Google – or more specifically Alphabet, its parent company – because of sky-high stock prices. That all changed in July 2022 when the company finalized a 20-for-1 stock split of two share classes, dropping the price from over $2,200 to around $110.
This Alphabet stock split has drastically increased the trader order volume for retail investors, while also positioning it as a potential addition to the Dow Jones index.
If some of that is hard for you to understand, don’t worry. We’re here to break it down for you. In this article, we’ll examine:
- What a stock split means
- Recent history of splits
- The decision behind the Alphabet stock split
- What has happened since
- How it affects the average investor
Let’s start from the beginning.
What is a stock split?
A stock split is when a company decides to increase the number of shares outstanding by issuing more shares to current shareholders. A 2-for-1 stock split, for example, would mean that each shareholder would end up with twice as many shares as they had before, but each share would be worth half as much.
The theory behind it is that by splitting the stock, it becomes more affordable and therefore more attractive to a wider range of investors. This can lead to an increase in demand, which drives up the price.
There are two schools of thought when it comes to splits:
- Some investors believe that a split indicates that the company’s stock is doing well and is about to enter a period of sustained growth.
- Others believe that a split is just a marketing gimmick and doesn’t have any real impact on the underlying value of the company.
For Alphabet, it is not yet clear which path they will follow.
Recent history of splits
In 2019, only two of the stocks listed on the S&P 500 went through a split, as the practice had slowed dramatically over the previous few years. That changed in a big way in 2020, when both Apple and Tesla brought it back with significant, successful splits.
Both only needed to announce the splits to drive value, with Tesla also experiencing a 10% jump after completing its August 2020 5-for-1 split.
Suddenly, it was back on trend and now several massive companies including Alphabet, Amazon, and Shopify have completed splits. What followed for those companies, however, hasn’t been as positive.
Alphabet has dropped since the split, following the same trend that Amazon and others have experienced, suggesting to some that stock splits won’t continue with the same fervor in the coming years.
Alphabet’s stock split decision
So why, after watching Amazon’s price plummet following its June 2022 20-for-1 split, did Alphabet follow suit?
The given reason was to “make our shares more accessible” according to Ruth Porat, the company’s chief financial officer. By dropping the share price to a more reasonable number, retail investors can flood into the market and start driving the price even further up.
For example, in 2021, Robinhood CEO Vladimir Tenev testified to Congress that the median account size for a user of the investment app was just $240. With that amount, something like Google was completely out of the picture.
Even the average size, which Tenev stated was about $5,000, wouldn’t be able to include Alphabet in any sort of diversified portfolio. The split allows more people to buy the stock, which in theory should drive its value up.
One of the not-so-public strategies for the company might also be to get Alphabet onto the Dow Jones index, something that many speculated was the driving factor behind Amazon’s split.
The Dow only lists 30 stocks, and wouldn’t include something that has a share price of over $2000 as it would make up too much of the index average. This is the playbook that Apple followed in 2014 when it executed a split and was listed on the Dow the following year.
By getting onto the Dow, Alphabet would theoretically:
- No longer be as volatile, as the stock would have to meet certain stability criteria to stay on the index
- Bring more attention to the company from a long-term investor standpoint.
Alphabet’s inclusion would also be significant because it would add another tech giant to an index that already includes Apple, Microsoft, IBM, and Intel.
Currently, the stock that is weighed most heavily on the Dow is UnitedHealth, which is trading at just over $529. To be anywhere near low enough to be included, Alphabet needed to execute a dramatic split.
What has happened following the split?
As mentioned, Alphabet’s price has fallen since the split was executed, and is now down more than 20% since it was announced in February.
It has had the desired effect of increasing retail trading volume, however. The share of volume is now over 8%, up from 2.8% this time last year according to Bloomberg. Still, it hasn’t been able to compete with the amount of institutional selling, resulting in a lowered value overall.
Source: Yahoo Finance
How it affects the average investor
What the Alphabet stock split means for the average person is simple: there’s now a real opportunity to “buy the dip” and invest in the company without having to go through an ETF. Even the most casual investor will be able to buy shares and get involved in the stock of one of the biggest companies in the world.
While there is no guarantee of return, the relative stability of the company and the growth potential in its new businesses, like cloud computing and driverless cars, make Alphabet an attractive investment for those looking to secure retirement portfolios and other long-term investment opportunities.
A stock split doesn’t usually have a significant impact on the overall value of a company. In the case of Alphabet, it might have created more opportunities for investors, but it’s unlikely to have a major effect on the share price in the long term.
That said, if you’re looking to invest in Alphabet, the stock split presents an excellent opportunity to do so at a lower price point. Just be sure to do your research on stock investing and understand the risks involved before making any decisions.