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• Alphabet announces July stock split
• YouTube ad revenue disappoints analysts
• Short-lived challenges?
1 to 20 stock split
As part of the balance sheet presentation for the 2021 financial year, the internet giant Alphabet announced that it would split the high-priced Class A, B and C shares at a ratio of 1 to 20. This stock split is scheduled to take place on July 15 after the close of trading, giving each shareholder holding shares on the July 1 key date 19 additional shares. This could not only make it easier for small investors to get into an alphabet investment, according to “CNBC” the Google parent could also make the leap into the Dow Jones. So far, the search engine giant’s share price is too high to be included in the index.
But what does the upcoming reallocation of the shares mean for interested investors? Should the shares be bought ahead of the split, or could it be worth waiting until after the event?
Alphabet stock under pressure
The high price of the shares could speak against a purchase before the split. For example, Alphabet Class A shares last traded at $2,134.31 per share (closing price on June 14, 2022). However, the price of the paper has been under pressure since the beginning of the year: At the beginning of January, the A-titles had already fallen by 26.33 percent, after an increase of 65 percent was recorded in 2021 as a whole. The price development of the B and C shares is similar.
A and C shares are freely traded on the NASDAQ technology exchange. However, B shares, which grant shareholders ten times the voting rights of A shares, cannot be purchased publicly and are reserved for founding members and insiders. In contrast, C shareholders have no voting rights at all.
Although the stock market is currently in panic mode between the war in Ukraine, high inflation rates and the fear of a rapid tightening of monetary policy, the fall in the price of Alphabet titles is also likely to be linked to the Internet group’s latest quarterly results.
Alphabet falls short of expectations in the first quarter of 2022
While the Google group was still able to show significant growth in the last two Corona years, the pace of company expansion slowed down significantly in the first quarter of 2022. Although sales increased by 23 percent year-on-year to about 68 billion US dollars, as Alphabet announced in April, analysts had expected a significantly higher increase. This also has statistical reasons, as CFO Ruth Porat explained. After the Corona crash in spring 2020, sales initially collapsed radically, but quickly recovered. Therefore, the first quarter of 2021 was also comparatively strong. Naturally, this pace can no longer be maintained.
Earnings per share for the first quarter of 2022 were $24.62 per share, compared to $25.75 expected by experts. In the same quarter last year, the value was 26.29 US dollars.
Amazon and Microsoft could dispute Alphabet’s share of the cloud business
A closer look at the individual areas reveals that the cloud business benefited from increased demand in the past quarter. The division’s sales grew by almost 44 percent to 5.8 billion US dollars, while the operating loss shrank from 974 to 931 million US dollars. This reduced the cloud segment’s minus, but there is still a long way to go before profitability is reached. According to “Investor’s Business Daily”, the fact that the network giant wants to tighten the price screw for some products in October should help.
But the competition doesn’t sleep either: Alphabet has to assert itself against the top dogs Amazon and Microsoft. This could succeed with the help of former Oracle manager Thomas Kurian, who the group recently hired. In addition, Alphabet could expand its position in the cloud market through further acquisitions, according to IBD. The data analysis provider Looker, which offers tools for business intelligence and data visualization, migrated to the Google portfolio as early as 2019. The cybersecurity service provider Mandiant followed in March. According to the portal, further acquisitions are possible, which will allow Google to advance its cloud platform with a focus on security, open source software and data analysis – a combination that could please some bullish Alphabet shareholders. According to analysts at UBS, the office tools from Google Workplace should also drive the cloud division.
YouTube Ad Revenue Analysts Disappointed
But Alphabet’s advertising business should not be ignored with regard to the future development of the group. The tech group’s advertising sales rose about 22 percent to $54.66 billion in the past quarter. But here, too, competitor Amazon is dangerous for the company based in Mountain View, California. Especially in the area of Internet search advertising, the mail order company Google disputes shares, as IBD further reports. In order to counteract this, Alphabet is said to have made adjustments in relation to e-commerce offers and simplified the connection to the online shop provider Shopify. Support for third-party cookies in the Chrome browser has also been postponed to the end of 2023.
The video platform and Alphabet subsidiary YouTube also saw advertising revenue increase in the past quarter. Here the increase in the first quarter was 14 percent to 6.9 billion US dollars. However, analysts had expected $7.21 billion. And here, too, the competitive pressure is growing: As was the case with Facebook before, the Chinese social media app TikTok is now also contesting YouTube shares. According to the IBD, Google keeps to itself whether the platform is profitable. Bank of America analysts expect YouTube’s subscription business to generate $18 billion in revenue by 2025. For comparison: in 2020 this was 5 billion US dollars.
Growth also expected in the investment budget
In addition, Google’s capital expenditures are likely to increase significantly in the current year, as forecast by IBD. For example, data centers, artificial intelligence, YouTube and consumer products are among the Internet group’s major cost items. Alphabet management has also approved $70 billion worth of share buybacks. Alphabet repurchased $13 billion worth of stock in the first quarter. “After exhausting most of its prior approval, Google ramped up its buyback program in April with the board approving an additional $70 billion worth of buybacks,” Investor’s Business Daily quoted Deutsche Bank analysts as saying. “The new and additional $70 billion authorization exceeds the previous $50 billion authorization announced in April 2021 and thus represents a larger portion of the company’s current market capitalization when considering the current decline considered in the tech industry.” Although the current program corresponds to just under five percent of Alphabet’s market value, the share could climb to seven percent of market capitalization for the rest of the year and in 2023. This could be an indication of future buybacks.
Goldman Sachs and Morgan Stanley see upside potential
So is it still worth getting into the paper at the moment or should investors be patient until after the share split? Experts at the US investment bank Goldman Sachs are already recommending buying Alphabet shares. Analyst Eric Sheridan recently lowered his forecast for the US tech sector due to expectations of a weaker economic environment, but the market observer did not shake the price target of USD 3,000 for the Google parent company. His industry colleague Brian Nowak from competitor Morgan Stanley also sees the paper at 3,000 US dollars in the long term, as the online magazines “Investing.com” and “Pulse 2.0” report, citing a study by the financial house. This would correspond to an increase of more than 40 percent compared to the current price level. Previously, the strategist thought a price of $3,270.00 was likely but now maintains his “Overweight” rating. However, Nowak’s downgrade also came as part of a sector re-rating that generally underperformed the internet industry. “Given the heightened uncertainty, we are taking a more pragmatic approach to our online advertising and e-commerce estimates. We now model ~13%/16% year-on-year growth for online advertising and ~8%/10% year-on-year for e-commerce in ’22/’23,” said the Morgan Stanley expert, according to Investing.com.
Although the share price could stumble in the coming months due to a weak economic environment and disappointing advertising sales on the video portal YouTube, tech expert Leo Sun from the market portal “The Motley Fool” also believes, but these are likely to be only short-term challenges. Sun predicts strong growth for the group within the next ten years. With regard to the imminent redistribution of the shares, the specialist gives the all-clear: He expects the price of Alphabet shares to benefit from the event, as the notes could increasingly become the focus of private investors and options traders. “Put simply, this tech titan remains a rock-solid investment in a turbulent market,” Sun said.
However, it remains to be seen whether the shares of the search engine group will be able to hold their ground in the currently weaker market environment in the long term and what consequences the stock split will have on the price of the title.
Editorial office finanzen.net
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