The other day I was talking to someone about the trend of mayors who take their salary in Bitcoin, and she objected to the practice because a Bitcoin is so expensive. “Does Eric Adams even get a whole Bitcoin for his salary,” she asked skeptically, and no he does not. I found this a strange objection. Bitcoin trades in essentially infinitesimal units; for one U.S. cent you can buy about 2,654 atomic one-one-hundred-millionth fractions of a Bitcoin, which is probably enough precision for any reasonable purpose. You can convert any amount of dollars into Bitcoins, there is no real discontinuity where 1 Bitcoin is vastly better than 0.9999 Bitcoins, and the nominal expensiveness of Bitcoin has no practical importance.
And yet this objection is not uncommon. You sometimes hear people say that they like some other cryptocurrency more than Bitcoin because the price of Bitcoin is off-putting, not in some fundamental-valuation sense but just in the sense that a $30,000+ price tag for anything will scare people off. People prefer to buy things where one whole thing costs a normal amount of money, even if the concept “one whole thing” makes no sense and has no practical importance.
I used to vaguely think that the rise of crypto, with its visibly arbitrary prices and its microscopic fractionalization of everything, would change this preference, but it has not. Specifically I used to vaguely think that stock splits would be less of a thing: If everyone understands that a $30,000+ price tag for Bitcoin is arbitrary and you can buy whatever fraction of a Bitcoin you want, then everyone will get used to the fact that a $2,700+ price tag for Alphabet Inc. common stock is arbitrary and you can buy whatever fraction of an Alphabet share you want. (At least you can now that retail brokerages offer fractional shares.) But nobody understands either of those things so:
Alphabet Inc. is bringing big stock splits back to the market, so prospective buyers won’t need upwards of $3,000 to own a share. Taking down the price achieves something else for the Google parent: making it possible to put America’s third-biggest company into its most venerated stock average.
The company said late Tuesday it will increase its outstanding shares by a 20-to-1 ratio, aiming to entice the numerous small investors who have flocked to the stock market during the pandemic. The shares jumped 10% in U.S. premarket trading on Wednesday, and were set to surpass their record high reached last November.
“The reason for the split is it makes our shares more accessible,” Ruth Porat, Alphabet’s chief financial officer, said in a conference call with television anchors. “We thought it made sense to do.”
For mom-and-pop traders, a lower stock price makes it easier to buy shares rather than purchase fractional stocks through their brokerage firms. Alphabet’s 20-for-1 split would reduce the price of Class A shares to roughly $138, based on Tuesday’s closing price of $2,752.88. A share of the company hasn’t been that cheap since 2005.
“Institutional investors can buy in size and the price per share doesn’t matter,” said Ed Clissold, chief U.S. strategist at Ned Davis Research. “But for a smaller investor, a lower price-per-share makes it easier for them to buy a reasonable number of shares.”
See I think that 0.05 shares is a perfectly reasonable number of shares to buy in your Robinhood account that encourages fractional-share investing, but no one agrees with me and that’s fine.
I think it’s charming that Alphabet cares? One very visible lesson of 2021 in financial markets is that retail investors are a powerful force, and you can get some more or less free shareholder value by catering to them. Making retail investors want to buy your stock drives up your stock price, which arguably gives you more financial flexibility (probably not a huge concern for Alphabet, which had $91.7 billion of operating cash flow last year) and which in any case is good for shareholders in itself (their stock is worth more). I often write about this in stupid terms, because there are a lot of stupid ways to cater to retail investors, and if you don’t care much about your dignity you can spend your earnings calls talking about how you’re going to start selling NFTs and accepting Dogecoin. Ruth Porat is a respectable person, and while splitting your stock is a slightly stupid way to appeal to retail shareholders, it is also quite respectably, traditionally stupid.
It is so traditional, in fact, that the stupidest investor who cares about nominal stock prices is the Dow:
Another motivation for the split could be gaining entry to the Dow Jones Industrial Average, whose price-weighted index has been a barrier for years to the likes of Alphabet and also Amazon.com Inc., which has a four-figure stock price, according to Michael O’Rourke, chief market strategist at Jonestrading.
The Dow’s archaic weighting system is based on share price rather than market capitalization, and in Alphabet’s presplit form it was just too big to add to the gauge without it overwhelming all the other members.
The Dow was invented over a century ago when stocks all cost $40 to $100, and if a stock cost $3,000 you’d need to pile sacks of gold coins on a horse-drawn cart to buy a round lot of 100 shares. If all the stocks cost $40 then the market was low, if all the stocks cost $80 then the market was high, and averaging the prices of all the big stocks was a good rough way to figure out what the market was up to. This has not been true for many decades, but fortunately it also doesn’t matter at all. For one thing, taking a sample of $100-ish stocks and averaging their prices gets you pretty close to replicating a market-cap-weighted average of a larger sample of stocks, so the Dow does a decent job of tracking real indexes like the S&P 500; for another thing, most index-fund money is indexed to real indexes so the Dow is probably not a huge driver of investment flows. Still it is a status symbol, and it drives some retail flows, and all that stuff is important right now so why not.Oh, by the way, an earlier version of that story said that “Alphabet has been at a disadvantage” with modern retail investors “as its stock is expensive and uses the name of a holding company, rather than the globally recognized brand, Google.” I never fully understand why Google thought it was a great idea to change its name to Alphabet, and that name has never really gotten much traction, but I gather that the explanation had something to do with making its business more legible to institutional investors. In 2022 I feel like the move is to rename your business to make it more meme-y for retail investors. Maybe they should go back to Google?