In July 2022, Alphabet plans to split its shares. Now the securities are worth more than $ 3 thousand, but due to crushing they will become more accessible to investors. We learned from experts what awaits the action before and after the split.
Approval of the split by shareholders is already a formality.
The board of directors of Alphabet, the parent company of Google, approved a split of shares in the ratio of 20:1. The company plans to divide all three classes of securities - A, B and C. Each investor registered in the register of shareholders on July 1, 2022, will receive 19 additional shares after the closing of trading on July 15.
As noted by The Wall Street Journal, trading adjusted for split will begin on July 18. However, before that, the decision of the board of directors must be approved by the company's shareholders.
According to Ksenia Lapshina, an analyst at Finam Financial Group, the approval of the split by the shareholders' meeting can be considered a formality. "Therefore, the issue can already be considered 99% resolved," she said. Valery Yemelyanov, an expert on the stock market of BCS World of Investments, also believes that the probability that shareholders will approve the split is "almost 100%." Other experts interviewed by RBC Investments also agreed with this.
The shares of a Class A company (ticker GOOGL) give the investor the right to one vote. Class B securities are not traded on open markets. They are owned by Alphabet founders Larry Page and Sergey Brin, as well as early investors. These shares give ten votes. In 2012, the company acquired Class C shares (ticker GOOG), which do not give voting rights.
Alphabet shares soared by 9% after the announcement of the securities splitting plan
Google , Alphabet , Financial Statements , USA
Why did Alphabet decide to split?
A split is the splitting of one stock into several. As a result, the number of shares in circulation increases, but their total value remains unchanged. A split is carried out when securities become excessively expensive and the company needs new investors. For example, on the premarket, Alphabet Class A shares are already worth more than $ 3 thousand. If the company were to split now based on this price, then one paper would cost about $150.
The last time Alphabet held a split was in 2014, when the price of its securities exceeded $ 1 thousand. Then the stock split took place in a ratio of 2:1.
According to Alphabet CFO Ruth Porat, the split will make the company's shares more affordable. Ed Clissold, chief U.S. strategist at Ned Davis Research, noted that for institutional investors, the price of one share does not matter. However, for retail investors, a reduction in the price of one paper will make it easier to buy shares.
Google founders Sergey Brin and Larry Page.
Are stocks growing before the split and is it worth buying Alphabet securities now
"Shares of growing companies that were trending before the split are accelerating after the news of the split. Actually, this is what we are seeing now: the first wave of growth is taking place against the background of the first news. After formal approval, we will probably see a second boost. There is also a third one - shortly before the split procedure itself," Valery Yemelyanov noted.
He said that in the last weeks before the crushing, the shares of such companies are growing faster than the market - in 60% of cases. According to the expert, Google shares have every reason to catch the same wave. Valery Yemelyanov believes that since the probability of further growth of Alphabet shares is high, it makes sense to buy them, but most of the growth in the company's securities has already been won back.
According to Ksenia Lapshina, the upcoming split is usually not the main driver of stock price growth, but it can become an additional factor. "We consider Alphabet's shares to be promising and one of the most interesting in the technology sector, and the published reports proved this," she said. The analyst added that in the next five months remaining before the split, Alphabet securities can bring investors a good return.
"Demand for stocks may increase after the split, which makes buying them on the eve of this event an interesting medium—term trading idea," says Barry Ehrlich, head of the analytical department of VTB Capital Investments.
He noted that in 2020 and 2021, several major technology giants split their shares at once - Tesla, Apple and NVIDIA. During the period from the moment of the split announcement to the actual splitting of the shares, their quotes grew by 20-70%, the expert added. "Of course, this result cannot be considered in isolation from the overall positive dynamics of the markets at this time, but the track record is positive," Ehrlich said.
However, Nikita Yemelyanov, the chief asset manager of Aton-Management, noted that there is no such trend that stocks necessarily grow before the split. "Usually stocks do not grow on this, or they grow, but very weakly, within the framework of daily volatility, " he said.
According to him, there are periods in the market when investors begin to pay attention to such events. For example, in 2020, after Tesla and Apple announced a stock split, their securities grew on this. "Then the shares reacted strongly to this, but this is rather an exception," the expert noted.
Nikita Yemelyanov said that the split is a technical moment that has a slight positive effect on liquidity. Fundamentally, it adds nothing to the company. No analyst will raise the fair value of shares only because of the split, and no fundamental investor will also reconsider the decision to invest in the company only on the basis of the split, the expert noted.
"The shares are already reacting with a 10% increase, and we believe that the news about the split has already been won back, especially since the split of shares by itself does not make the fundamental value of the company higher," agreed Mikhail Denislamov, analyst at Freedom Finance investment company.
In his opinion, it makes sense to buy Alphabet shares before the split only if the investor believes in the long-term prospects of the business.
What will happen to Alphabet shares after the split?
Liquidity growth
According to Lapshina, after the split, we can expect increased demand for the company's shares, which will provide an influx of additional capital. "We can recall last year's splits of Apple, Tesla and NVIDIA, which played into the hands of issuers," she said.
Now Alphabet shares are inaccessible to speculators due to their high cost, after the split the situation will change, which may lead to an increase in volatility, the analyst believes. Valery Yemelyanov agreed that the split will increase the liquidity of the shares, which is beneficial to all their holders. However, he believes that the value of Alphabet securities will remain at a high enough level not to make them a potential target for retail speculators.
"It can really increase liquidity, but, again, this is such a very temporary effect," Nikita Yemelyanov believes. This is more important for options traders where there is a minimum lot.
An option is a contract under which the buyer of an option gets the right to buy or sell an asset at a certain time at a pre-agreed price. For example, stocks. However, a right does not mean an obligation. The buyer may decide not to use it, but the value of the option is not refunded. The seller is obliged to exercise the option.
Growth or decline: how can Alphabet shares behave
According to statistics, after the split, the share price does not rise sharply and does not fall, that is, it moves in a small range of prices - it consolidates, Valery Yemelyanov noted. "Excessive positivity goes away, there are often corrections. But the main trend remains," he said.
According to the expert, Alphabet is now "in good financial shape." The company has presented the best of its reports for many years, and the road to further growth is open. "Now the company is worth $2 trillion, after a profit growth of 10% above expectations, it may well swing to $2.5 trillion by the end of this year," he believes.
Mikhail Denislamov noted that after the split, stocks may experience short-term pressure, since the market often operates on the principle of "buy on rumors, sell on facts." In addition, the company's securities have grown by almost 200% since the end of March 2020, so a number of large funds and private investors who already have significant "floating" profits on shares can use liquidity to close positions — that is, they can sell securities for profit-taking, the analyst said.
Nevertheless, Freedom Finance considers Alphabet shares undervalued and maintains a positive long-term view of the securities, Denislamov noted. "At the same time, we emphasize that the growth rate of revenue in 2022 will slow down significantly — from 41% year-on—year to 17% year-on-year, so we do not expect a repeat of such a rapid rise in Google shares, which was observed in 2021," he said.
Inclusion in the Dow Jones Index
According to Nikita Yemelyanov, the split of Alphabet shares "opens the door to the Dow Jones index."
The expert noted that this is a specific index, which includes 30 stocks. And unlike the S&P 500 index, where companies are included depending on their capitalization, the Dow Jones includes exactly one stock at a time. Accordingly, if the paper is expensive, then it will have too much weight when calculating the index. The Index Committee does not need this, so they do not include too expensive securities in the Dow Jones, even large companies.
After the split, Alphabet shares will fall in price, so they can enter the Dow Jones, given that it is the third largest company in the United States by capitalization. "The index committee has a task to ensure that the index still corresponds to the real economy. Therefore, it is logical here that Google should at least get on the radars of people who are engaged in the selection of companies," said Nikita Emelyaov. In addition, it already includes Microsoft and Apple.
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