Is Google Stock a Buy Ahead of Its Next Stock Split? (NASDAQ:GOOG)

Sean Gallup/Getty ImagesNews

When is Google Stock Splitting?

Alphabet (NASDAQ:GOOG)(NASDAQ: GOOGL) recently announced a 20:1 stock split that will take place in July 2022. Registered shareholders will receive an additional 19 shares for each share held after market close on Friday, July 15. Alphabet the stock will begin split-adjustment trading on Monday, July 18. As of this writing, the split-adjusted price would be around $140 per share.

A stock split has no direct effect on the underlying value of a security. The split could make Alphabet stock a candidate for inclusion in the Dow Jones Industrial Average. A stock that trades for thousands of dollars per share would not be a candidate due to Dow’s method of calculating the index. After the split, it will be in the right price range.

Google’s announcement sparked a flurry of other high-profile split announcements. Amazon (AMZN) announced its own 20:1 split, which was long awaited. The stock will begin trading after split adjustment on June 6, 2022.

Not to be outdone, Tesla (TSLA) also announced that it would seek shareholder approval to implement its split. Tesla last split its shares in August 2020 – less than two years ago. As noted below, he’s had another spectacular run since the split. However, before the recent announcement, the title was fading.

Graphic
Data by YCharts

Key figures of alphabetic actions

Alphabet reported strong results in fiscal 2021. Sales were up 41% year-over-year (YOY) while operating profit grew 91%. Since 2020 was somewhat of an anomaly due to the pandemic, it is essential to look at the Compound Annual Growth Rate (CAGR) that includes 2019 when discussing growth.

Revenues grew at a CAGR of 26% during this period, while operating profits grew at a CAGR of 52% – very impressive on both counts. As shown below, operating profit grew at a higher rate due to a stronger operating margin in 2021.

Alphabet revenue and operating profit

Source of data: alphabetical. Table by author.

Ultimately, diluted earnings per share (EPS) for 2021 hit a record high of $112.20. This is a massive increase from the $49.16 and $58.61 earned in 2019 and 2020.

In addition to the increased margins, the massive EPS increase is supported by the company’s continued share buybacks. Alphabet has repurchased over $80 billion in stock in 2020 and 2021 combined. This represents just over 4% of the current market cap.

What is the long-term outlook for Google Stock?

Google Search continues to be the straw that stirs the drink for Alphabet, delivering more than 57% of the company’s revenue in 2021 on 43% year-over-year growth. However, YouTube ad sales have been impressive, growing 46% in 2021. YouTube ad sales have grown over 90% since 2019.

Google Cloud sales have also followed a terrific growth trajectory. In 2018, the segment achieved less than $6 billion in sales. This segment reached over $19 billion in sales in 2021, as shown below.

YouTube Ads and Google Cloud Revenue

Source of data: alphabetical. Table by author.

The Google Cloud segment is not profitable, unlike Amazon’s AWS segment. In 2020 and 2021, the Google Cloud segment recorded operating losses of $5.6 billion and $3.1 billion, respectively. Meanwhile, AWS has an operating margin of around 30%.

This presents a huge area of ​​profitability that Google has yet to tap into. As this segment evolves, the benefits should come. As shown below, the operating loss decreased significantly in 2021.

Information about Google Cloud segments

Source of data: alphabetical. Table by author.

The Google Cloud segment could generate substantial future earnings if management can swing this segment into profitability and increase margin while continuing to grow sales.

Is Google Stock a buy before or after the upcoming split?

Whether to buy a stock before or after a split is anyone’s guess. The stock often gets a pre-split surge as investors anticipate the stock’s rise. Then there may be disappointment after the stock split.

Tesla announced its 2020 split on Aug. 11, and the stock rose until the day of the split, only to fall in the following days.

Graphic
Data by YCharts

However, Tesla tends to be more volatile than many stocks, so perhaps Apple (AAPL) is a more appropriate comparison.

Apple announced its 4:1 stock split on July 31, 2020, and the stock began trading on an adjusted basis on August 31. The chart below clearly shows where the stock jumped on the announcement, crossed the split, and then pulled back, much like Tesla.

Graphic
Data by YCharts

Does this mean the same will happen with Google? Of course not. However, it is very suggestive that there could be a solid buying opportunity in the days following the split.

Is Alphabet Stock a buy, sell or hold?

Alphabet stock has been consistently outperforming for some time. In the past year alone, it has provided significantly better earnings than the broader market.

Graphic
Data by YCharts

Wall Street analysts have a strong buy rating on the stock, according to Wall Street analyst rating center Seeking Alpha. Analysts have 49 buy or strong buy ratings with one hold rating and no sell rating. Alphabet stock has significantly outperformed the market over the past year, as shown above.

Graphic
Data by YCharts

In 2022, results weren’t stellar, but the stock comfortably beat the Nasdaq Composite (QQQ), as shown above. In a recent article before the split was announced, I speculated that Alphabet would be one of the best long-term stocks for investors. I continue to believe that it will outperform the market in the future.

Comments are closed.