Yesterday after the market close, Alphabet (GOOG, GOOGL), the parent company of Google, announced their Q4 earnings, and they were spectacular. The company earned $30.69 per share, $4 per share more than the consensus Wall Street estimate going in, on equally impressive revenue of $75.33 billion. Even those great numbers were overshadowed by something else the company announced: They will soon undergo a twenty for one stock split.
For small investors, a huge number of whom hold at least some Alphabet shares in their portfolio, this raises a few questions. First and foremost, what does that actually mean? And more importantly, how will it impact their portfolio? According to the conventional wisdom, the answers to both those questions are simple but recent history on the impact of splits has called conventional wisdom into question, at least in terms of the immediate impact.
The twenty for one stock split announced by Alphabet means that on a given date, holders of their stock will be given nineteen additional shares to add to each one that they currently own. Where some people misunderstand what that means is in terms of the impact on their portfolio. It won’t make your holding twenty times as valuable overnight. You aren’t getting free shares; the company is just forcing an adjustment to the nominal price of their stock.
When the split is enacted, the price of each share will adjust to be one twentieth of what it was before. So, for example, if GOOG were trading at $2,000 per share on the day of the split, the price of each that day would drop to $100. If you held one share at $2,000 pre-split, your holding was worth $2,000. After the split, you will have 20 shares at $100 for a total value of $2,000.
It isn’t really that confusing, but there are a couple of things that make it less simple than it should be. The first is that in most brokerage accounts, the price of the shares will be adjusted before the quantity, making it look for a time as if you have taken a big loss on GOOG or GOOGL. That is because the “transaction” that gives you more shares takes three days to clear, while the adjustment to the quoted price is immediate. If you see that in your account, don’t panic, it will all sort itself out.
The second is that recent splits by high-profile tech firms suggest that the split itself will have an impact on the overall value of your holding, at least for a short time. At the end of August last year, Apple (AAPL) and Tesla (TSLA) split their stock on the same day, Apple four to one and Tesla five to one. As I said, that should have no overall impact, but history shows that it did. On August 31, 2020, the day of those splits, the S&P 500 lost around 9 points. AAPL rose around one percent on the day, while TSLA jumped more than 10%. That doesn’t tell the whole story, though. In the weeks leading up to the split, both stocks posted massive gains, way beyond the market average.
There were obviously people who saw the splits as positives for the stocks. That could result from ignorance and a misunderstanding of how splits work but, given the sheer volume of shares that had to be bought to prompt the move, that is highly unlikely. More likely is that it was a sign that even the big Wall Street guys are human. It is completely illogical, but AAPL at around $100 attracted more buyers than at $400, and Tesla was much more attractive at $250 than at $1250.
As I said, that is illogical, but the market doing something illogical is hardly anything new. Given the history, it is not unreasonable to expect the same thing to take effect here with Google shares and, when you add in the very logical positive impact after such a blowout fourth quarter, the immediate future for the stock looks bright as a result.
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Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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