Should You Buy Alphabet Ahead of Its Stock Split?

$Alphabet(GOOG)$

Key Points

• Alphabet just announced its first stock split since 2014.
• There is plenty of momentum with Alphabet in the near term to justify buying the stock now.
• The tech giant's investments in artificial intelligence are driving massive gains in its advertising business.

Shares ofAlphabet(NASDAQ:GOOG)(NASDAQ:GOOGL)surged close to new highs following a period of strong revenue growth in the fourth quarter of 2021, ended Dec. 31, 2021. Not only did Alphabet deliver impressiverevenue growthof 32%, but it also announced a 20-for-1stock split. If approved by shareholders, Alphabet will issue 19 additional shares for every share owned on the record date of July 1, 2022. The split will take effect on July 15.

The last time Alphabet split its stock was in 2014. While the split will make Alphabet's $3,000 share price much cheaper, stock splits really don't matter in the grand scheme of things.

Stock splits are not free money. You get more shares, but the stock price also drops proportionally, so the total value of your investment remains the same.

The good news is that Alphabet looks undervalued at current price levels and could head higher in 2022 and beyond. Engagement on YouTube is surging in the creator economy, and Alphabet's investments in artificial intelligence (AI) should make Google Search smarter in delivering relevant results for individual users and advertisers over the long term.

AI is at the heart of Google

YouTube became enormously more valuable to Alphabet during the pandemic. OnApple's iPhone and iPad, specifically, YouTube's monthly active users (MAUs) are estimated to have nearly doubled to 844 million since the beginning of 2020, according to data from Statista.

Millions of people use Google, YouTube, Gmail, Maps, and other services every day. The high traffic volume fuels Alphabet's advertising revenue, which amounted to $61 billion in the fourth quarter, an increase of 32% over the year-ago quarter.

Google services generated nearly $26 billion in operating profit on $65 billion in revenue last quarter. Alphabet is reinvesting those profits in artificial intelligence, which makes its services more helpful to users looking for information. It also helps businesses manage their advertising campaigns, as Alphabet's Chief Business Officer Philipp Schindler noted on the earnings call:

We're using more AI to help advertisers measure their results and bid intelligently with data-driven attribution, for example, which uses very advanced [machine learning] to more accurately understand how each marketing touchpoint actually contributed to a conversion, obviously, while respecting user privacies.

AI-driven advertising is helping Google and YouTube perform better than other ad-dependent platforms. For example, Facebook owner Meta Platformsexpects weak advertising revenue in the near term. It cited concerns over the economy that are leading some advertisers to tighten their advertising budgets.

Meta also blamed "increased competition for people's time," and YouTube might be to blame. YouTube ad revenue grew 25% to $8.6 billion in the quarter. More people are engaged with YouTube to watch product reviews, makeup tutorials, video games, funny pets, etc. There are two million creators using YouTube to monetize their video content. It's estimated that this creative ecosystem contributed $20 billion to the U.S. economy in 2020.

A solid long-term investment

In 2021, the company's net income nearly doubled to $76 billion. That has brought the stock'sprice-to-earnings ratiodown from over 30 a year ago to just about 25 at the time of this writing, which looks attractive relative future growth expectations. Analysts expect Alphabet to grow earnings at an annualized rate of 27% over the next five years.

Alphabet's massive profitability gives it plenty of cash to improve existing services that make them even more valuable to users. This cycle of investment and growth should give investors confidence in the company's future.

Stock splits might be less important today than, say, 10 years ago, due to the availability offractional shares at some brokerages. But the split certainly could lead to more demand for the shares from those who can only buy whole shares. Regardless of what impact the split has on the stock price in the near term, investors should absolutely consider investing in Alphabet. With such a strong brand and highly profitable business, this is a stock investors can build a portfolio around.