Over the past few years, we have seen some of the biggest tech names reduce the nominal share price by going through a stock split process. This reduces the barrier to entry for small investors and provides more liquidity for exchanges and institutional traders. Alphabet Inc. is currently doing much better than some of the FAANG stocks and is shaping up for some good opportunities over the next few months.
Google investment idea
On 1st February, Alphabet Inc. announced record quarterly sales, with the mega-cap company beating expectations and reporting $257.6 billion in revenue for the year, which is a 41% increase. According to Google's parent company, the board of directors has also authorized and declared a 20-for-1 stock split "in the form of a one-time special stock dividend payable on each share of the company's class A, class B, and class C stock." This decision must now be approved by stockholders but anyone holding shares between today and July 1st, 2022, will see their nominal amount of shares dramatically increase, even if their net equity stays the same. Alphabet Inc's share price soared 7.5% in trading the day after.
Companies splurging on stock splits can be costly and time-consuming, so why do they do so?
In the first place, splits are often conducted when a company's stock price is high, which makes it difficult for smaller investors to purchase a standard lot of 100 shares. Dropping the share price, therefore, makes buying shares more accessible to retail traders and the institutional buyers have a greater liquidity pool to sell into. Secondly, dropping the share price also helps a company get into an index like the Dow Jones Industrial Average which is a price-weighted index. At $3000 per share, GOOG would have an overweighted influence on the direction of the blue-chip company index. Dropping down to $150 per share puts GOOG share price in a Nike or JPMorgan & Chase price bracket and therefore similar influence on the index during price moves.
Previous Apple and Tesla stock split announcements triggered a surge in retail buying. When Apple announced its 4-for-1 split in July 2020, retail investors went from purchasing less than $150 million in Apple stock each week to nearly $1 billion. Tesla's five-for-one split in August 2020 boosted retail sales from $30 million to $40 million per week to over $700 million a few weeks later. On the day of those splits, the S&P 500 lost around 9 points. AAPL rose around 1% on the day, while TSLA jumped more than 10%. In the weeks leading up to the split, both stocks posted massive gains, way beyond the market average. And it's not uncommon for companies to exceed the price level at which they had split their stock in the past, requiring a stock split yet again. Walmart has split its shares as many as 11 times on a 2-for-1 basis since its IPO in the 1970s.
The GOOG share price action shows the gap higher after the earnings report release as traders with access to extended hours trading bid the share price higher. During the proceeding 3 trading days into the NFP release the market makers, traders and investors were successful in keeping the price higher than the pre-earnings level but I still think the gap gets filled as long-term investors looking to get their orders filled. If the price action doesn’t take out the previous lows around $2480 the technicals say this is in a bull trend and history could repeat itself in the same manner as the Tesla and Apple stock splits.
Unfortunately for Alphabet and the other tech large-cap names, the S&P500 (USA500) and Nasdaq (UsaTec) are now technically building a bearish market structure, with the rally with GOOG dragging the indices up to their resistance levels. I am starting to think the GOOG news was what the Bears needed more than anything else. A bunch of buyers to sell into. Hopefully, I am wrong and GOOG can not only go higher but with the support of the main indices that it is currently part of. A rising tide lifts all boats, but the indices can pull even some of the best companies lower too when there is a market sell-off due to the hunt for liquidity.
Facebook's forward guidance on earnings was poor and the revenue is flattening off, which is one good reason why the indices dropped the following day. Google and YouTube are taking advertising revenue from Facebook and other Meta Platforms Inc. apps. This could be a reason for having diamond hands and holding the Alphabet Inc. stock. You’d be betting on future growth.
Looking at the current share price of GOOG versus AAPL and FB, it is clear that investors have lost faith in the Meta Platform Inc. narrative, as earnings are decreasing following Apple’s privacy terms and conditions changed. The changes Apple made in iOS 14.5 by asking people if they wanted to opt-out of apps tracking them across the web are causing problems for advertisers who rely on Facebook to sustain their businesses. If end users opt-out of being tracked due to privacy concerns, the Facebook ad revenue model is severely compromised. Not only that, but Facebook CEO Zuckerberg is also plowing on into the metaverse, where lifestyle changes required by covid-19 lockdowns become a thing of normality. The metaverse will allow us to stay at home, never to reach out into the real world but still somehow interact in the virtual realm, as if it were a reality. After 2-years locked in by the government I personally will be choosing to interact with as much outside space and people in the flesh as possible. I just may choose not to commute to do it.
The market sentiment currently is one full of uncertainty, inflation, market correction, etc. So not a lot of positives. However, Alphabet Inc. is the internet as far as I am concerned, and it would be very hard to bet against the thing that my life relies on. With the feeling that we will see higher prices in the run-up to July’s cut off, I would be willing to wait for a pullback into the current trading range as signified by the Andrews Pitchfork median line or wait for a classic retest of some sort of breakout above a new swing high. This would then be limited by how many days until the stock split there were as the frenzy of buying that I predict could diminish until the stock resumes normal trading a couple of weeks later.