Tech Stocks: The Deal with the Google Stock Split (NASDAQ: GOOG)

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Google Inc. (NASDAQ: GOOG) reported first-quarter earnings after the close yesterday (Thursday) and the Internet search giant did not disappoint – and also delivered a surprising stock split announcement.

First quarter profits at the Mountain View, CA-based company soared 61% to $2.89 billion, or $8.75 a share, up from $1.8 billion or $5.51 a share a year ago. Excluding stock-based compensation, profit rose to $10.08 from $8.08 a share. Total revenue was up 24% to roughly $8.14 billion.

Analysts had anticipated earnings of $9.65 a share and revenue of $8.15 billion, according to Thomas Reuters.

While the numbers were a little light, the company appeased investors with an upbeat outlook going forward.

Google also made an unexpected move: a two-for-one stock split.

Google's Stock Split

Shares rose a tepid 1.1% after hours as the company divulged plans to create a new class of non-voting capital stock, which will be traded on the Nasdaq.

A stock split increases the number of outstanding shares, while leaving the total dollar value of the shares the same, because no real value has been added as a result of the split. In a two-for-one split, each shareholder receives one additional share for every share owned. A company will often split its stock when the share price has risen so high, many investors find the shares too expensive to buy.

Google's "tricky" stock spilt actually gives the company's founders and main shareholders, CEO Larry Page, Chairman Eric Schmidt, and co-founder Sergey Brin, more clout in the company with the maneuver. The new split shares will not have any voting rights, and don't allow shareholders to vote on key issues such as corporate policy and members of the board.

Google already has a dual-class share system. That gives the three founders' stock 10 votes per share, or 66% of the voting power.

Industry analysts shared a mix reaction to the move, questioning its benefit for GOOG shareholders.

"What's odd is that we don't believe there was any real demand for this move by institutional shareholders," Citigroup's Mark Mahaney wrote to shareholders. "The positive spin is that the details imply a long-term commitment to the company by the Founders. The negative spin is that the details help ensure that future employee stock/option grants and stock-based acquisitions won't dilute the Founders. It's good to be Founder… A real shareholder wealth creation step would be the paying of a dividend. But we don't expect to see one for several years…"

Mahaney reiterated his "Buy" rating on the stock with a $750 price target, a 15% premium to Thursday's $651.01 closing price.

Google didn't disclose a date for the split. It first plans to file papers next week with the U.S. Securities and Exchange Commission. Shareholders will vote on the split at the annual meeting June 21 – and since the three founders hold the majority of voting power, the measure should be approved.

GOOG Pleases with Future Prospects

The company was buoyant about the numbers and animated about its prospects for the future.

"We also saw tremendous momentum from the big bets we've made in products like Android, Chrome and YouTube," CEO Page said in a statement. "We are still at the very early stages of what technology can do to improve people's lives and we have enormous opportunities head. It is a very exciting time to be at Google."

Currently Google has the leading market share of search advertisements, and aims to keep it that way. The company also continues to grow in areas outside its traditional search business, making it a dominant force to be reckoned with against established and viable competitors in the mobile, social networking and online video markets.

What held GOOG's share price in check following the release was the disclosure that while the number of clicks on Google increased, the amount of advertisers paid per click fell. Paid clicks are a measure of how frequently consumers click on Google's ads.

U.S. paid clicks rose 39% from a year ago and 7% from the prior quarter. But the average cost that advertisers paid Google per click fell 12% during the same period and dropped 6% from the last quarter.

Several analysts last quarter cringed at the falling costs per clicks, and Google assured then that more competitive pricing would lead to more clicks. Google was true to its word; click growth came in at double the rate of growth a year earlier.

Surprisingly, the company did not mention its growing social network site Google+, nor did it discuss its pending acquisition of Motorola Mobility Holdings Inc. (NYSE: MMI).

According to data from Thomson/First Call, the analysts' mean recommendation on GOOG is a "Buy," with a median target price of $725.

Google stock was down 3.36% to $629.14 Friday by 11:30 a.m. EDT.

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  1. Tudor Davies | April 14, 2012

    Although Google needs to take the drop seriously, I can understand their comments about the future of the company. The inclusion of Youtube to their service and the development of Google+ indicate future growth of the company.

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