Stock-Split Watch: Is Alphabet Next?

Companies clearly love to see their stocks soar. But one potential problem is when the stock reaches such a high level that it actually becomes difficult for some investors to access it -- or when the stock "looks expensive" at a particular level even if valuation shows it's reasonably priced. The great news is companies have an easy way of managing the situation, and announcing this particular move usually gets investors pretty pumped up.

I'm talking about the stock split. It's something many high-flying technology companies have used to bring their shares back to Earth in recent years, from Nvidia to Broadcom. And the good news is if after a stock split the stock surges again, the company can launch other splits as needed -- so this isn't just a once-in-a-blue-moon maneuver.

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And that means as we look for the next stock split company, we can consider players that already completed such operations in recent years. A great example is Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), which split its stock back in 2022 and has since seen the shares climb more than 40%. Is the tech powerhouse ripe for another split? Let's find out.

Image source: Getty Images.

More shares for current holders

So, first, a quick note on how a stock split works. A company issues additional shares to current holders, but the total value of their holdings doesn't change. Instead, only the price of each individual share drops. The number of shares holders receive depends on the ratio of the split -- for example, in a 10-for-1 stock split, you get 10 shares for every one you already own. And the new share price depends on the closing price of the stock on the day before the operation.

Investors like stock splits because they make certain stocks more accessible to a broader range of investors -- and the move shows a company is optimistic its stock has what it takes to roar higher again. But it's important to keep in mind that a split itself isn't a catalyst for stock performance, and it isn't a reason to buy or sell a particular stock. So you wouldn't buy XYZ company just because it's launching a split, but instead because it has a great earnings track record and exciting future prospects.

Now let's consider Alphabet. Back in 2022, when it last split its stock, the company was most known for its Google Search platform -- and it still is. Google Search is the most popular search engine worldwide, and advertising across Google drives Alphabet's billion-dollar revenue. But today Alphabet also is gaining ground in another area -- and it's an area that could supercharge growth in the years to come. And this is artificial intelligence (AI), a market forecast to surpass $1 trillion just a few years from now.

Alphabet and AI

Alphabet has developed its own large language model (LLM), Gemini, that it's used across its business -- from helping search generate better results to helping advertisers on the platform fine-tune their campaigns. And Alphabet sells AI tools to others -- everything from top AI chips to complete AI systems -- through its Google Cloud business. Due to the great desire of companies to get in on AI, Google Cloud has seen strong demand in recent quarters. And that's prompted the company to reinforce investing to support its AI growth, with the intention to spend $75 billion this year alone.

All of this means Alphabet could be heading for a big wave of growth over the next few years as customers use its AI products and services to develop their projects and apply AI to their businesses.

So, investors who buy Alphabet shares gain access to this newish growth driver of AI plus Alphabet's impressive track record of earnings growth, built through years of leadership in the search market.

Is now the right time for a stock split?

Could now be a good time for Alphabet to launch a split? The company has completed three splits in the past, showing it's open to such operations, and as mentioned, since the last split, the stock has climbed in the double-digits.

Still, in recent weeks, Alphabet, like many other tech stocks, has lost some momentum. Investors' concerns about the economy ahead has put pressure on growth stocks, and that's left Alphabet trading just under $160 a share -- a price that doesn't put it out of reach for many investors. It's also important to note that the stock trades at much lower levels than it did prior to its previous splits -- on those occasions it traded at more than $500 a share and even into the thousands of dollars.

So, while the economy preoccupies investors and hurts their appetite for tech stocks and as Alphabet remains around current levels, I wouldn't expect the company to be next on the stock split list.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Nvidia. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.