In the midst of earnings season, perhaps the biggest jaw-dropping news event of all was the announcement from Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL), the parent company of internet search engine Google and popular streaming platform YouTube, that it would be enacting a 20-for-1 stock split.
Assuming shareholders vote in favor of the split (and there’s no reason to suggest they won’t), each share of Alphabet’s stock would be valued around $143, post-split, by mid-July. That’s down from a close this past weekend of almost $2,866 a share (for the Class A shares, GOOGL).
The skinny on stock splits
A stock split is a way for a publicly traded company to alter its share price and outstanding share count without affecting its market value. For example, if a company’s shares were trading at $400, and said company enacted a 4-for-1 stock split, shareholders would receive three additional shares for each share they already owned. Thus, if you had 10 shares at $400, you’d own 40 shares at $100 after the 4-for-1 split. The market value of the investment hasn’t changed (both are still $400 total investments), but share price and shares outstanding have been adjusted.
This common type of stock split, known as a forward split, tends to get investors excited for two reasons. First, forward stock splits make shares more nominally affordable for retail investors. Even though some brokerages allow users to buy fractional shares, this isn’t the case with every online brokerage. It’s a lot more palatable for investors to purchase a single share of Alphabet around $143 than it is to save up almost $2,900 to buy a single share now.
Secondly, forward stock splits are almost always a sign of a successful business. A publicly traded company’s share price wouldn’t be high in the first place if it weren’t executing well and innovating.
Having watched numerous big-name companies receive a boost after announcing a stock split, the following three high-flying stocks may be next to follow in Alphabet’s footsteps.
Believe it or not, e-commerce giant Amazon (NASDAQ:AMZN) has actually split its stock three times since its initial public offering. However, all three of those splits occurred in a 15-month stretch between June 1998 and September 1999. With no split activity for more than 22 years, the kingpin of online retail now has a share price of $3,152. That’s a prohibitively high cost for one share.
The reason Amazon may jump at the opportunity to split its stock is simple: There’s been a changing of the guard. As long as Jeff Bezos was CEO, it seemed unlikely that a stock split would be a consideration. But with Andy Jassy officially taking over the reins on July 5 of last year, the prospect of a split should be put back on the table. Jassy founded and led Amazon Web Services, the high-margin cloud infrastructure service segment that’s No. 1 globally in cloud…
Read More: 3 High-Flying Stocks May Follow Alphabet and Enact a Stock Split