Discover more from Kingswell
Much Ado About Alphabet's Stock Split
(1) When sending birthday wishes to his close friends, Warren Buffett reportedly writes, “May you live until Berkshire Hathaway splits.” The implication, of course, is that this will never happen. At least not on Buffett’s watch.
The Oracle of Omaha has remained staunchly anti-split even as Berkshire’s Class A shares soared to more than $475,000 a piece. Despite being bombarded with questions about a potential split, Buffett always politely demurs that such a move would be financially meaningless and might attract a more volatile (and short-sighted) group of shareholders.
Over the years, a handful of other world-class companies like Alphabet (the parent of Google) and Amazon seemingly followed his lead in allowing their stocks to appreciate into the $2,000-3,000 per share range. Like The Conservative Income Investor, I hoped this decision hinted at a desire to emulate Buffett in other ways, too.
So imagine my surprise when Alphabet announced a 20-for-1 stock split last week…
If you’ve enjoyed reading Kingswell, please take ten seconds out of your busy day to share this post or leave a like. Thank you for your support!
And, if you’re reading this and aren’t subscribed yet, please click the button below to receive this newsletter via email.
(2) Okay, here’s the deal: After market close on July 15, 2022, investors will log into their brokerage accounts and see nineteen additional shares of Alphabet for every one that they already owned. Pretty sweet, right?
As TCII so perfectly puts above, stock splits are mostly “cosmetic nonsense”. No one’s getting 20x richer overnight. Sorry.
Imagine a pizza with an 18” diameter. Whether cut into eight slices or twelve, the overall size of the pie remains the same. So, too, for stock splits.
Alphabet’s price, which currently bounces around $2,700, will be reduced by a factor of twenty on the same day all those extra shares hit your account.
It’s a zero-sum game. More shares at a proportionally lower price, but no fundamental change to Alphabet’s overall valuation or shareholder wealth.
(3) Once upon a time, Google co-founders Larry Page and Sergey Brin understood this. For years, they resisted splitting $GOOG even as the price skyrocketed well over $1,000 per share. All the while, the duo sang straight from Buffett’s hymn sheet, warning that any split might attract the wrong kind of investor not in accord with Google’s forward-looking mission.
Self-interest, though, always wins out. Google began dishing out lots of stock options to employees and using shares to acquire smaller companies (like YouTube). This explosion of Class A shares, each with one vote, threatened to overwhelm Page and Brin’s closely-held control of the company.
So, in 2014, the co-founders created a new non-voting class of shares to sidestep the issue entirely. One Class C share was then distributed to all existing shareholders, resulting in an effective 2-for-1 split. Page and Brin now had (non-voting) shares to use for stock options and acquisitions, all without diluting their control any further.
(4) Rationally speaking, stock splits don’t mean much. But when has the money game ever been rational?
People LOVE stock splits. Probably because it seems like you’re getting something for nothing.
In just the past two years, both Tesla and Apple announced stock splits and rode that investor exuberance to dizzying new highs. $TSLA jumped 70% in just twenty days between split announcement and execution, while $AAPL settled for a more modest 17% rise in the immediate aftermath.
Nowhere else does swapping a dollar for four quarters inspire such excitement.
If anything, I’m a little surprised that Alphabet continues to trade relatively flat after its own stock split announcement. The price did hop 7% the next day, but quickly settled back into its pre-announcement range. A welcome return to rationality, perhaps.
One caveat: Splits can be viewed as a bullish sign from management. No one splits their stock without the strong expectation that it will go up in the near future. Plus, stocks don’t typically reach a level that justifies a split without some pretty good price (and business) momentum. That’s the pro-split side of the argument, anyway, especially since the advent of fractional shares diminished the accessibility angle.
And one exception: Stock splits are great if you’re into options.
(5) Stock splits might not mean much, but that’s no reason to side-eye Alphabet. This company is a rocket.
Consider: Alphabet has…
91.4% earnings per share growth in 2021
Nine different products with more than one billion users (Google Search, Gmail, YouTube, Google Maps, Android, Google Drive, Chrome, Google Photos, and the Google Play Store)
$139 billion of cash on hand, against just $14.8 billion of debt
$67 billion of free cash flow in 2021, with no dividends or other obligations
Nearly 29% of the worldwide digital ad market
No wonder $GOOG is up almost 1,000% over the past decade. And, even with that insane price growth, it still trades for just a bit above 24x earnings.
If you’re ready to hit the buy button on Alphabet, no one could blame you. This is one of the most impressive companies in the entire world. Just don’t do it solely because of the 20-for-1 stock split.
Disclaimer: This is not financial advice. I am not a financial advisor. Do your own research before making any investment decisions.