Alphabet Splits Its Stock: Should Investors Think About Buying?

Tim Phillips

July 20, 2022

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Google has become a verb. Whenever we want to find out something, turning to our smartphone and “googling” it means we have access to seemingly infinite information at our fingertips.

For investors, putting money into Google’s parent company – Alphabet Inc (NASDAQ: GOOGL) – has been an incredibly profitable endeavour.

With that success has come a soaring share price, which saw Alphabet shares close last week at over US$2,200 apiece.

However, back in February of this year, Alphabet announced that it was carrying out a 20-for-1 stock split.

The stock officially started trading at its 20-for-1 share price of just over US$110 this past Monday (18 July).

It follows on from a 2-for-1 stock split back in 2014 (for what was then Google), the company’s only other stock split prior to the latest one.

So, should investors think about buying into Alphabet shares following the company’s latest stock split?

Google possesses a wide moat in search

For Alphabet, its Google search business possesses an extremely wide moat given its one of the two dominant online ad services along with Meta Platforms Inc (NASDAQ: META).

However, unlike Meta Platforms, Google actually owns multiple platforms that generate ad dollars. First and foremost, it has its “Google Search and other” division.

This makes up the bulk of revenue for the firm and includes Google’s search business along with ads from other Google applications such as Gmail, Maps and the Google Play app store.

For the most recent first quarter of 2022, this unit delivered a whopping US$39.6 billion in revenue – around 57% of Alphabet’s total revenue of US$68 billion during the period.

Meanwhile, its YouTube ads business – which is growing fast – contributed US$6.8 billion in revenue.

Finally, on its ad side it has Google Network, which covers revenue that’s generated from selling ads outside of Google’s own platforms.

Many publishers and app makers are turning to these tools to manage campaigns. One such service is AdSense, which has more than two million content publishers as customers.

Google Cloud is exciting

While Alphabet’s Google Cloud service is a distant third behind Microsoft Corporation’s (NASDAQ: MSFT) Azure and Amazon.com Inc’s (NASDAQ: AMZN) AWS, it’s still growing substantially.

In the latest quarter, the cloud computing unit put up revenue of US$5.8 billion – registering 45% year-on-year growth from the same period in 2021.

Tapping into the digital transformation theme, Google Cloud will continue to provide a viable alternative to enterprises that don’t want to deal with the two big players of Microsoft and Amazon.

Ad spending will be hit in event of recession

One thing to consider for investors is that online ad spending will likely be one of the first things to be cut in the event of either a US or global recession.

Given ad budgets will be cut, the online space won’t be immune to any economic slowdown. Inevitably, that will impact Alphabet’s core Google ad business.

However, it’s also important to note that this can also be considered as already baked into valuations. Alphabet shares trade at a trailing price-to-earnings (PE) ratio of 20.3x.

Meanwhile, Microsoft shares trade at a PE of 27x while fellow mega-cap tech giant Apple Inc (NASDAQ: AAPL) trades at a PE of 24.6x.

At the end of the day, for investors interested in owning a quality business generating huge profits and cash flows, then Alphabet’s recent stock split has made it much more affordable.

 

Disclaimer: ProsperUs Head of Content & Investment Lead Tim Phillips owns shares in Microsoft Corporation.

About the Author: Tim Phillips

Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth. He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer. In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.