Source: PaxForex Premium Analytics Portal, Fundamental Insight
During Alphabet's Q4 and full-year last year earnings call on Feb. 1, management announced that its board of directors had approved a 20-to-1 stock split, as of July 15. Alphabet is one of many tech giants that have announced stock splits in recent years. In 2020, FAANG leader Apple held a stock split, as did Tesla. Nvidia did a stock split in 2021, and recently Amazon and Shopify announced a split later this year.
If you're one of the many investors thinking of buying Alphabet stock right now, the announced split raises the question of when to buy. Let's see if it's worth investing in Alphabet stock now, before the split, or if it's better to wait until after the split happens, which fits your investment profile better.
As a general rule, stock splits are not designed to change the market value of a company. Rather, the number of shares outstanding is increased by a predetermined number. Subsequently, the stock price falls in proportion to that number, so that the total value of the company does not change.
But while the intrinsic value of the company does not change, sometimes in capital markets emotions can outweigh logic, making shares rise before a stock split occurs. Some investors prefer to buy the stock before the split, hoping that once the split takes effect and the stock is cheaper, more investors will buy the stock, boosting its price in a short period. Essentially, these investors are taking advantage of momentum, trying to make short-term profits. While there are pros to this trading strategy for some types of investors, let's look at a few examples of why buying before the split and holding the stock throughout the split period may be more profitable in the long run.
When it comes to recent stock splits, investors are more likely to encounter similar paradigms in trading activity.
Apple held a stock split on August 31, 2020. Apple stock then closed at about $129 per share. About a month later, the stock price dropped 10% to about $116. However, if the investor held the stock, he would get a 28% return, since Apple's current share price is about $166 per share.
Similarly, Tesla did a split on the same day as Apple in 2020. Adjusted for the split, Tesla stock closed at about $498 per share. About a month later, Tesla stock was down 14% to close at $429 a share. As with Apple, if investors had held Tesla stock through a period of short-term volatility and momentum trading, they would have gained 96%, as Tesla now trades at about $975 per share.
Next up is Nvidia, which completed a stock split last summer. Adjusted for the split, the stock closed at $186 a share after the split. About a month later, Nvidia stock was up 12% to $208 a share. If you had held the stock until today, you would have gained 18%, as the stock is currently trading at $219 per share.
The common theme of all of these examples is that the stock price usually rises over the long term and shows resilience even in short-term momentum trades when traders buy and sell stocks during these pivotal events.
For the fiscal year ended Dec. 31, 2021, Alphabet posted revenues of $257.6 billion, up 41% from 2020. The company reported outstanding results in all of its business segments, both in revenue and operating income. Alphabet's total operating profit in 2021 was $78.7 billion, up 91%. These operating profits had a direct impact on the company's cash flow, and Alphabet is wasting no time channeling these profits into future growth drivers.
In 2022, Alphabet announced two significant acquisitions, both related to cloud cybersecurity. Most recently, the company announced the proposed acquisition of Mandiant for $5.4 billion. The deal is especially interesting because the company said Mandiant's products and services would be built into Alphabet's existing cloud offering, the Google Cloud Platform. Google Cloud had revenues of $19.2 billion in 2021, but it remains unprofitable as the unit lost nearly $3.1 billion.
Investors should be inspired that Alphabet's leadership has identified and is actively seeking catalysts for future growth that can be integrated into existing business segments. As investments in digital transformation and the cloud market, in general, begin to take shape, Alphabet is well-positioned to take advantage of these tailwinds and grow an already impressive business to even greater heights.
It's important to remember that market timing is more important than trying to pinpoint market timing. When it comes to splits, many different strategies can lead to profitable returns depending on how you invest. We see that investors who own shares of the big tech companies that are part of the Alphabet group tend to perform better over the long term compared to investors with short holdings.
Between the impressive top-line growth, increasing profit margins, and strategic investments as a catalyst for future growth, Alphabet gives investors several reasons to buy the stock now, before the split, as opposed to waiting after, when the stock seems less expensive but is essentially the same.
As long as the price is below 2650.00, follow the recommendations below
- Time frame: D1
- Recommendation: short position
- Entry point: 2605.01
- Take Profit 1: 2500.00
- Take Profit 2: 2443.00
Alternative scenario:
If the level of 2650.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 2650.00
- Take Profit 1: 2800.00
- Take Profit 2: 2873.00
