Google Stock Split Into More Classes: Buy, Sell, Or Hold?

Apr.17.12 | About: Alphabet Inc. (GOOG)

As part of their earning announcement last week, Google (GOOG) announced changes to their stock structure. In essence they announced the intent to split the stock 2:1. From an economic viewpoint this will have the same impact as any stock split. Doubling the shares and halving their value. However, in this case, the new shares will have no voting rights. Over time this action seems to consolidate operational control with the founders and not the broader shareholder community. Google describes their rationale and provide some more detail on this approach approach in their 2012 founder's letter.

In full disclosure, I am long Google. My general rationale for being long this stock is described in an earlier seeking alpha article. Hence for me and many Google shareholders, this announcement is a catalyst to review the holding. My thoughts on this announcement's impact on an investment in the stock are shown below:

Because this is a non-traditional approach to governance, it seems many pundits do not like this news. I understand their concerns and am generally sympathetic with the objective to have more investor say over a direction of a company. However, how does a modest, retail investor profit from having greater voting rights? In some cases, it is possible that an activist investor might get involved and create a bump in the stock price. Is Google really the type of company where this is going to happen in the mid-term? I doubt it. Hence, from my perspective as a shareholder of very modest proportions, this loss of control is not a big negative.

Google's founders will likely ultimately use this provision to keep better control of this company. Several aspects of having them control the company seem like a positive, including:

  • In reality an investor is currently tied to the vision of the founders and will be for a long time with or without this provision.
  • One of the reason I state for investing is Google in my original article above is it seems Google now owns the mantle of industry visionary/leader. Long ago it was IBM, then Microsoft, now Apple. Will Apple be the leader forever? Is Faceboook really the new technology leader? I doubt it. If you want to invest in the visionary leaders of the future, it seems Google is still the best choice.
  • The key reason given by Google to keep more control of the company with the founders is to be better be able to make longer term investments with less pressure from short-term shareholders and Wall Street. To me, it is refreshing to see a company taking specific actions to enable themselves to think a little longer term. It seems that far too many publicly traded companies are quarter-to-quarter focused which may not be the best approach to build long-term shareholder value. Hence this approach might actually a refreshing way to facilitate a little more long-term thinking in a company.

Given the thoughts above, this announcement does not change my perspective that accumulating Google shares now could be a good long-term investment.

From a much more short-term timing and trading perspective, here are some next potential steps.

  • As stated above, it is likely most press will be negative about this split for awhile. That may tend to push the stock down a bit. Hence, I it might be worthwhile to wait for a pull back under $600 to add to or create a position in Google.
  • I don't believe a date for the stock split has been unannounced yet. From an economic viewpoint, in theory the split date should not impact the share price. However, at these high of levels, cutting the price in half could create better demand in the retail community, so perhaps it would be to buy before, not after, the split.
  • From a more speculative perspective, an option based strategy might be worth considering in this situation. If the stock dips in the shorter term based on this announcement, but yet grows in the loner term, some sort of risk reversal option approach might be worthwhile considering. For example; selling the Sept $600/$550 put spread would generate about $20 in cash that could be used to buy the September $670 call. There is no out of pocket costs to this trade. The maximum loss for this trade is defined at $500/contract. The trade makes money if Google sets new highs over $670 and can grow without limit.

Disclosure: I am long GOOG.

Disclaimer: This posting is for informational, educational and entertainment purposes only and should not be considered investment advice.