3 must-haves of the alphabet and Amazon stock splits

It’s been a crazy year on Wall Street in many ways. After a steady rise in broad market indices in 2021, investors have faced steep declines in the 125-year index Dow Jones Industrial Averagereference S&P500and dependent on technology Nasdaq Compound in 2022. In fact, the Nasdaq was in bearish territory just last week.

A number of stories and events have caused wild hesitation in the market, including the uncertainties associated with the spread of COVID-19, supply chain issues, historically high domestic inflation and the ongoing conflict. between Ukraine and Russia.

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But it’s not all bad news. The respective 20-for-1 stock split announcements of Amazon ( AMZN -0.90% ) and Alphabet ( GOOGLE -1.14% )( GOOG -1.26% ), the company behind popular internet search engine Google and streaming platform YouTube, lit a fire under the shares of both companies. It also raised a lot of questions as to what, if anything, these stock splits might mean.

Below, I’ll walk you through the three must-haves of the Alphabet and Amazon stock splits.

1. It’s all about aesthetics

Arguably, the biggest takeaway from the two stock split announcements is that these moves are purely cosmetic.

A stock split is a way for a publicly traded company to change its stock price and the number of shares outstanding without affecting its market value or the underlying performance of its business. For example, if a company had 10 shares outstanding and those shares each traded for $1,000, the company’s total market capitalization would be 10 X $1,000, or $10,000.

If this company did a 5-for-1 forward stock split, the number of shares outstanding would increase by a factor of five, while the stock price would decrease by the same factor (i.e. say 1/5 of the previous price). Instead of 10 shares trading at $1,000, a 5-to-1 stock split would aesthetically change things to 50 shares outstanding at $200 each. Note that the market value of the business is still unchanged at $10,000.

Although the above example is fictional, the same premise and calculations apply to all stock splits. With Alphabet and Amazon both announcing forward 20-to-1 stock splits, the number of shares held by investors will increase by a factor of 20, while the share price of both companies will decline by a factor of 20 (i.e. 1/20th of what they were before).

Assuming both stock splits receive shareholder approval, Amazon’s split would take place in early June and Alphabet’s in mid-July. Based on where they closed last weekend, an Alphabet (Class A, GOOGL) share would cost around $136, while an Amazon share could be had for around $161.

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2. Retail investors are the big winners

The second thing to know about these stock splits is that they are potentially significant for retail investors.

Over the past two years, online brokers have rolled out new tactics and services to woo retail investors. This includes waiving commission fees on trades on major US exchanges, eliminating minimum deposit requirements, and potentially offering fractional share investments. The latter allows an investor, who may not have a lot of money in their account, to buy a fractional share of a stock at a high price.

The problem for investors is that not all online brokerages offer fractional stock investing. Last weekend, Class A shares of Alphabet and Amazon closed at around $2,723 and $3,225, respectively. Unless you have a lot of money in your brokerage account, it would be difficult to buy a single stock of either company.

However, these upcoming stock splits will make it much easier for retail investors to grow their money in these two historically excellent FAANG stocks. In a post-split environment, investors with $1,000, $500, or even $175 of free cash in their brokerage account will be able to take positions on Alphabet and/or Amazon, even without access to fractional investing. shares.

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3. These splits validate the superior operating performance of Alphabet and Amazon

The third thing investors need to understand about the huge Alphabet and Amazon stock splits is that they validate the long-term outperformance of both companies. Stock splits are usually done when a company’s stock price is high – and this tends to happen when a company performs well and innovates more than its competitors.

To provide additional context, shares of Alphabet (GOOGL) have soared more than 5,300% since its initial public offering (IPO) in 2004. Meanwhile, Amazon’s stock has gained 164,500% since its IPO nearly 25 years ago.

Alphabet’s incredible comeback is a function of the company’s dominance in internet search, as well as the promise offered by its ancillary growth channels. According to data from GlobalStats, Google has held between 91% and 93% of the global Internet search market share for at least two years. This quasi-monopoly status gives the company excellent advertising pricing power.

In terms of ancillary growth opportunities, YouTube now generates $34.5 billion in annual ad revenue, with cloud infrastructure service Google Cloud surpassing $22 billion in annual revenue during the fourth quarter. Google Cloud has steadily grown by 45% to 50% each year.

As for Amazon, an August report from eMarketer estimated that the company would control 41.4% of all online sales in the United States last year. That’s nearly six times the online retail share of the closest competitor.

However, Amazon’s future lies in its higher-margin segments, such as cloud infrastructure service provider Amazon Web Services (AWS), advertising and subscriptions. Although AWS only represents 13% of net sales in 2021, the high margins associated with cloud services helped it generate 74% of Amazon’s operating profit for the year.

The upcoming 20-for-1 stock splits for Alphabet and Amazon validate their continued operational excellence.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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