Down 23%, should investors buy Alphabet before its stock split?

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

alphabet stock represented by man using Google search engine on computer

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Shares of the leading search engine operator, Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG), have hit a roadblock, falling 23% since the start of the year. The company will undergo a 20-for-1 stock split on Friday, July 15, with the aim of making its shares more affordable and alluring to retail investors. Of course, it’s important to note that stock splits have absolutely no effect on the market value of a company.

When companies initiate stock splits, the number of outstanding shares increases and the price per share decreases. This occurs proportionately so that the market capitalization of the company remains unaltered. On that note, investors shouldn’t get distracted by Alphabet’s upcoming stock split; instead, they should focus on the company’s fundamentals to determine whether to buy the stock. So is Alphabet a worthy investment right now.

Smooth sailing for Alphabet’s business

Business is solid for the search engine giant. In its opening quarter of the year, the company’s total revenue surged 23% year over year to $68 billion, and its diluted earnings per share fell 6.4% to $24.62. Although Alphabet’s business was strong on all fronts, the Google Cloud segment performed particularly well, with revenue rocketing 43.8% to $5.8 billion. Both its gross profit margin and operating profit margin remained steady year over year at 43.5% and 29.5%, respectively.

For this fiscal year, analysts expect Alphabet’s top line will expand 15.3% year over year to $297 billion, but see its bottom line pulling back 1.3% to $110.77 per share. In 2023, which is when comparable metrics should be more favorable, Wall Street projects total revenue will climb 15% to $341.5 billion, with earnings per share increasing 18.6% to $131.40. In an economy brimming with uncertainty, these are encouraging growth rates and certainly impressive metrics for a company of Alphabet’s size.

What makes Alphabet a phenomenal investment at the moment is its exceptional balance sheet and ability to generate cash at a rapid clip. The search engine operator boasts $20.9 billion in cash and cash equivalents, and it generated a jaw-dropping $69 billion in free cash flow (FCF) over the past 12 months. The company’s first-class balance sheet and cash flow generation provide a major safety net in the event of a recession, so much so that investors won’t need to worry about Alphabet’s ability to ride out any economic storm. And as icing on the cake, the stock’s 20.1 price-to-earnings multiple is below its five-year average of 32.4.

Don’t worry about the stock split

Don’t pounce on Alphabet just because of its upcoming stock split. Instead, consider buying shares of the tech giant because it operates a wonderful business and now trades at a discounted valuation. Have no fear of the ongoing market sell-off, either, as corrections often lead to phenomenal long-term investments. And given Alphabet’s persistent operational success, elite balance sheet, and unrivaled cash flow generation, the company appears to be a no-brainer at existing price levels

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Down 23%, should investors buy Alphabet before its stock split? appeared first on The Motley Fool Australia.

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Luke Meindl has no position in any of the stocks mentioned. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet (A shares) and Alphabet (C shares). The Motley Fool Australia has recommended Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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