Why Investors Shouldn’t Care About Alphabet’s Stock Split

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) is the parent company of both Android and Google, and the high value of these two brands helps make Alphabet’s stock very expensive. In fact, as of Feb. 16, it was more than $2,700 per share.

Soon, the per-share price will be much lower, though. Alphabet announced it is splitting its stock 20-for-1 in July. Shareholders of record on July 1 will end up with 20 times their number of shares. But each of those shares will be worth around $135, assuming the stock is still trading for around $2,700 at the time.

Stock splits get a lot of headlines, and they leave many investors asking whether to buy before or after the split occurs. The reality is that it really doesn’t matter at all. Here are two big reasons.

Image source: Getty Images.

1. Nothing has changed in terms of the stock’s actual value

The foremost reason that the stock split shouldn’t matter to investors is that it hasn’t changed the underlying value of Alphabet shares. The company has simply created more shares of stock, so each one has a lower price and buys you a smaller ownership interest in the company.

The easiest way to understand this is to compare the stock split to slicing up a pie. If you initially cut it into four big pieces but then divide it further into eight smaller ones, you haven’t created more pie — you’d need to take two pieces after the second cut to end up with the same amount as one piece before.

Likewise, Alphabet hasn’t created more value by splitting its shares.

2. Splits no longer make the stock more accessible

One big argument about why stock splits matter is that they make purchasing shares more accessible.

Not a lot of investors can afford shares priced at $2,700 or more. Since there’s theoretically a limited pool of people who can buy Alphabet at its current price, reducing the cost of entry with a split makes it possible for more investors to buy in — thereby increasing demand and possibly driving up the stock price.

But this argument no longer makes sense because fractional shares are available from a huge number of mainstream brokerage firms. With fractional shares, investors don’t have to buy a full share to invest in a company; they can buy just part of one. In fact, with some brokerage firms, it’s possible to buy as little as 0.001 of a share just as long as you’re investing at least $1.

Thanks to fractional shares, any investors who want to buy Alphabet but who don’t have $2,700 to do so can specify how much they want to invest and get a stake in the company. If they have $135, they could end up with a 20th of a share. If investors do this before the split, they’d be left with one full share after the split occurs. They’d be in exactly the same position if they bought now, than if they wait to trade at the lower post-split price.

Because the pool of possible buyers is no longer restricted by a high share price, Alphabet’s decision to split should matter even less to investors since it shouldn’t even produce a price increase that could come from increased accessibility.

While the headlines surrounding the company’s decision may generate some additional trading action, any change in the share price should ultimately be temporary, and investors shouldn’t care one way or the other about the split.

10 stocks we like better than Alphabet (A shares)
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

They just revealed what they believe are the ten best stocks for investors to buy right now… and Alphabet (A shares) wasn’t one of them! That’s right — they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of January 20, 2022

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Christy Bieber has no position in any of the stocks mentioned. The Motley Fool owns and recommends Alphabet (A shares). The Motley Fool recommends Alphabet (C shares). The Motley Fool has a disclosure policy.

Leave a Reply

Your email address will not be published.