The time has come for Google (NASDAQ:GOOG) to split its stock. That’s what Needham’s Mark May asserts in a research note Tuesday morning. He says that the company’s refusal to split the shares is hurting both its own stock and the perception of the Internet business generally.
“Retail investors and the mass media are often confusing a high stock price with a high valuation,” he says, and interpreting discussion of the stock’s move over $600 and price target’s topping $700 “as a sign that the Internet bubble has returned.”
Google should fix this this problem, he says. “We believe this is potentially bad for Google and for the sector, and see several compelling reasons why Google should consider a stock split,” May adds. He proposes the company split 10-for-1.
He sees four benefits from a split:
- Reducing the share price would increase retail ownership. He says a split would be consistent with the founder’s letter in the company’s original IPO filing what stated “It is important to us to have a fair process for our IPO that is inclusive of both small and large investors.”
- Increased retail participation could improve liquidity, “which in return could increase Google’s overall value.”
- Greater share ownership could reduce share price volatility; retail investors have long holding periods than institutions, various studies have shown.
- More retail ownership would diversify the shareholder base, “which has one of the highest institutional ownerships of any company its size.” He notes that GOOG is 84% owned by institutions, versus 67% for comparable sized companies.
May notes that there are two reasons often noted for not splitting:
- The company seems to think it is like Berkshire Hathaway (NYSE:BRK.A). In the 1983 Berkshire annual report, May notes, Warren Buffett writes that splitting the stock would “downgrade the quality of our shareholder population, and encourage a market price less consistently related to intrinsic business value.”
- A split would increase trading volume, which some view as increasing volatility.
“With all due respect to Mr. Buffett,” May writes, “we believe the benefits cited for Google outweigh the concerns cited by Mr. Buffet in 1983.” Among other things, May thinks the average investor is more rational than Buffett suggests, and that the emergence of hedge funds have changed the nature of the average institutional investor.
Meanwhile, May also lifted his price target on the stock to $690 from $575, as he shifts to a focus on 2008 results, rather than 2007. May maintains a Buy rating on the stock.