Could Google Split Its Stock After Earnings?

Google (GOOG-NASDAQ) reports earnings after the close today, but even the remaining few unwired monks in Tibet probably know that by now.  Google is expected to post $3.30 EPS & $2.495 Billion in revenues; next quarter $3.42 EPS & R$2.64 Billion.  Keep in mind that revenues are ex-TAC (traffic acquisition costs) and the company gives no guidance.  If you would like to see what else to look for, here is the full earnings preview of what we ran yesterday ahead of earnings.

After reviewing the options trading today, the inefficiencies of its stock having such a high stock price start to become clear.  In percentage terms the actual strike comparisons are more favorable because it makes the distance in between strike prices less on a percentage basis.  But in reality, it is keeping the trading volume, investor base, and ease of entry down.  There is also the argument that the volume and open interest could change drastically.  Even sophisticated portfolio managers in interviews commented at $300, $400, and $500 that the stock had run up too much and would frequently refer to the actual stock price more so than the actual price/sales or forward price/earnings ratios.  If portfolio managers and ‘smart money’ is tricked into this raw stock price analysis, then you know Main Street might be in the same camp.  In fact, if the street estimates are accurate, GOOG shares trade at somewhere close to 33-times 2007 expected EPS; and that is not a number that most fund managers can claim as overly excessive for this growth story.  So what is the answer?

Google has one of two options here as far as we are concerned that would do nothing to change the underlying structure of the company.  The company could announce an outright stock split as option one.  If the company doesn’t want to do this outright, they could add into their presentation on their conference call this sentence: "We are reviewing our current stock price efficiency, but have not yet made any determinations."  In truth, some have already noted in the past that this could come up for review down the road but nothing has ever happened.  This would let the company stick its toe in the water to see how the market reacts instead of jumping in outright.

This "hope of a split" has been hoped for on numerous occasions and by more than numerous market players.  We have made note of this before, and we are not at all the only ones that have pondered this (CNET, Motley Fool, CNN, TheStret.Com, and more).  So far nothing has come from the company on this, but it could be the thing that makes Wall Street (or at least Main Street) fall in love all over again.

The shares closed at $476.01 yesterday.  It has been as high as $513.00 in 2007 and as low as $360.00+ in 2006.  Back in January 2006, GOOG shares were almost at the same levels as now.  The company priced its IPO at $85.00 back in 2004, and the company has sold shares in secondary offerings since the IPO twice; the first time at $295.00 and the second time at $389.75.  So, the company doesn’t HAVE to maintain this high-price strategy by any stretch of the imagination.  This will all boil down to what the company wants to do, and they really don’t have to answer to anyone.  We can’t predict this by any means, but maybe the company should consider this since it would have no net impact on the operations of the company. 

Jon C. Ogg
April 19, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.