Alphabet | Fundamental Analysis + NEXT TARGET | MUST READ | The countdown has begun. There are less than ten days to go before Alphabet's 20-to-1 stock split on July 15.
Many are undoubtedly contemplating buying up the tech giant's stock before the date. The idea behind such a decision is that Alphabet stock could jump if a lower price attracts an influx of small investors.
That could be a winning strategy. But here are a few reasons not to buy Alphabet stock before the split.
The need for cash in the near term
Never invest cash in a stock that you may need in the near term. The definition of "near term" may vary from person to person. However, a good rule of thumb is not to invest cash that you might need in the next five years.
The past few months have clearly demonstrated why such a cautious stance makes sense. The S&P 500 has experienced its worst first half of the year since 1970. Alphabet is performing worse than the S&P, with its stock down about 25 percent over the year.
There is no guarantee that Alphabet's impending split will serve as a positive catalyst. Amazon also had a 20-to-1 split last month. The company's stock didn't soar but instead fell. Alphabet may well suffer a similar fate.
Lack of diversification
Another straightforward reason why you shouldn't buy Alphabet stock before it splits is that your investments are not sufficiently diversified. The most obvious example of a lack of diversification, in this case, would be the fact that Alphabet already makes up the majority of your overall portfolio.
But you may also have most of your investments in other growth stocks that are highly correlated with the movement of Alphabet stock. In that case, buying Alphabet won't help improve the diversification of your portfolio.
The point of diversification is that it reduces overall risk. The old adage about not putting all your eggs in one basket is more relevant than ever.
Recession Concerns
If you fear a recession is just around the corner, you probably shouldn't buy Alphabet stock before the company does a split. The company's stock has not performed well during previous recessions.
For example, during the Great Recession of 2008 and 2009, Google stock fell more than 60 percent. During the short pandemic recession of 2020, the stock fell 23% below its previous high.
Concerns about the recession are understandable. Nearly 70% of economists surveyed by the Financial Times predict that the U.S. economy will enter a recession next year. Some investors, such as ARK Invest CEO Kathy Wood, believe we are already in a recession.
You may have noticed that none of the above reasons have anything to do with Alphabet itself. The need for cash in the near term, lack of diversification, and fears of an impending recession are legitimate reasons for not buying any stock.
Beyond that, we have not discussed the advantages of buying Alphabet before the split versus buying it after the split. No one knows what will happen next, as there are too many variables.
However, we can think of several good reasons for buying Alphabet that have nothing to do with the split. In particular, the company has an exceptionally strong business market. The likelihood that any competitor could knock Alphabet from its position seems very low.
Alphabet also has many growth drivers. Its core Google advertising business remains strong. Its Google Cloud division continues to show strong growth. And its famous "other bets" (especially Waymo's self-driving car technology business) could also contribute significantly over time.
Reasons to stay away from Alphabet focus on the short term. But for investors focused on the long term, any time could be a good time to buy the stock.
