Editor’s note: This article has been updated from an earlier version.
Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) stock split in 2014 might seem like ancient history in the fast-changing world of investing. Yet, there are many people who have resisted an Alphabet investment because they are unsure of what the split means or which stock to buy. What’s the difference between these two types of Google stock? And is the Google stock split something that could happen once again?
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The stock split was announced initially as far back as 2012, and it took effect in 2014. Since then, investors have been scratching their heads at whether GOOG or GOOGL is the right stock for their portfolio. At the time, the split was not particularly well received, with investors worrying about the company hoarding voting power from shareholders.
Why Did Google Stock Split?
Originally, Google stock existed purely as GOOGL, which refers to class A shares. These shares have traded on Wall Street since the company’s 2004 IPO. Class B stock also existed since then as well, but this is private stock with much greater voting power.
GOOGL stock’s growth pattern is very solid. But, in 2012, company founders Larry Page and Sergey Brin noticed the price tag of GOOGL could be creating a barrier to entry for new investors. At the time, GOOGL stock was trading at well over $650, making it one of the most expensive stocks on Wall Street.
Page and Brin wanted to cut the price of the stock, but not at the expense of losing voting power. Thus, the company instituted a savvy split, rather than a new stock issuance. Through this split, the company was able to offer a new class of stock, the class C GOOG.
GOOG vs. GOOGL: What’s the Difference?
Most stock splits take a simpler route and see new shares issued. However, Google was able to tread a thin line between lowering share prices and keeping voting power centralized with its split. Page and Brin were able to retain control over the company, and the split — while controversial — proved effective at cutting prices down. Here’s what you need to know:
- Prior to the stock split, there was one class of shares for outside investors, GOOGL. The other class of shares, class B shares, were (and still are) privately held shares for insiders, founders and other especially relevant figures.
- Owning a share of GOOGL equates to one vote. However, owning one share of class B stock equates to 10 votes.
- Without wanting to up the voting power of GOOGL shareholders, the company sought out a way to lower prices. They couldn’t have both through normal means, so the company instead created GOOG as a whole other class of share.
- GOOG shares don’t come with any voting rights; these are class C shares.
- Those who owned GOOGL before the stock split received both GOOGL and GOOG upon the split; for every GOOGL share owned, investors received one GOOG share.
- The split did come with a catch for the company, though. For every share of class C GOOG stock sold by Google, the company had to convert a class B share into class A GOOGL stock. So, Page and Brin were able to keep control over the company; but, there was a slippage in governance power held by class B shareholders.
- Interestingly enough, the stock split saw both stocks represented on major indices such as the Nasdaq 100. Upon splitting, the index actually briefly held 101 stocks.
- A rebalance in Q2 of 2014 saw this corrected. Now, class C GOOG shares represent the company on indices.
- A lawsuit around the stock split also saw Google agree to compensate GOOG holders if the price of the stock limped behind that of GOOGL after a year.
What Experts Said About the Google Stock Split
Investors might have found the split unsavory; it was a blatant attempt to lower prices without diminishing Page and Brin’s control. Of course, the controversy is what spawned the class-action lawsuit around the stock. But, financial experts weren’t down and out about the Google stock split. Rather, many saw it as a great opportunity to add the assets to their portfolio at a discount. After all, GOOGL stock historically has performed very well; aside from the split, the only event that caused significant turmoil for the stock was the 2008 market crash.
As the split was occurring, experts like Associated Press tech writer Michael Liedtke were assuaging investors by noting that Google wasn’t doing anything necessarily out of the ordinary. In fact, there is a long lineage of companies issuing new classes of stocks to cut prices:
“Although still rare, Google’s reliance on nonvoting stock to protect their founders’ interests isn’t unprecedented in the technology industry. Facebook (NASDAQ:FB), LinkedIn and Yelp (NYSE:YELP) all have issued nonvoting stock for the same reason as Google. Both cable and Internet service provider Comcast (NASDAQ:CMCSA) and cable-TV channel network Discovery Communications (NASDAQ:DISCA) already operate under similar stock structures to the one that Google is setting up.”
Chuck Jones of Forbes says of the split that keeping power centralized at the top — between Page and Brin — isn’t a bad thing, especially seeing how far they’ve come at that point by calling all the shots:
“Maybe it’s a good thing that the two people who had the vision and technical expertise will be able to do whatever they want and since they have such huge wealth tied up in the company you would expect that they would run it for the long-term benefit of the other shareholders.”
InvestorPlace analyst Louis Navellier spoke highly of the split at the time as well. Navellier said the split would open up traders to potential buying opportunities down the line:
“Splitting Google stock may make the shares a little more volatile as it opens the stock up to more activity from day traders who were kept at bay by the four digit stock price, but that can actually be good for us as it creates buying opportunities from time to time.”
Will Google Stock Split Again?
As I mentioned earlier, this split might seem like ancient history in a fast-moving tech market. But, if the past serves as any prediction for the future, there are lots of questions to be asked over whether Google stock will split again.
Just by looking at the price movement of GOOG and GOOGL stock since this split, one can see the same issues arising which Google sought to address in 2012. The prices of both of these stocks are through the roof. Many thought the $700 price of GOOGL was bad in 2012. They certainly won’t like the current $3,000 prices for both GOOG and GOOGL.
Beyond this barrier to entry, the restructuring of Google into the broader Alphabet makes a case for a new stock split. In 2015, the company reconsolidated as Alphabet. As Larry Page described the company at the time of the rebrand, it is an ecosystem of many different companies, rather than one entity:
“What is Alphabet? Alphabet is mostly a collection of companies. The largest of which, of course, is Google. This newer Google is a bit slimmed down, with the companies that are pretty far afield of our main internet products contained in Alphabet instead. What do we mean by far afield? Good examples are our health efforts: Life Sciences (that works on the glucose-sensing contact lens), and Calico (focused on longevity). Fundamentally, we believe this allows us more management scale, as we can run things independently that aren’t very related.”
Of course, this gives more incentive to split once again, when recalling recent splits by General Electric (NYSE:GE) and Johnson & Johnson (NYSE:JNJ). Each of these companies presents a very different reason for the splits. GE split into three companies to revitalize a struggling business model. J&J split into two entities to accommodate the fast growth of its prescription drug development arm.
Google is obviously not struggling as a company like GE, but J&J’s split does present a solid claim for Google to split once again. The prices of GOOG and GOOGL continue to rocket far beyond an average investor’s budget. At the same time, different Alphabet companies distance themselves from the pack and require increased resources and attention. Thus, the case for another stock split continues to grow.
On the date of publication, Brenden Rearick did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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