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3 Reasons Not to Buy Alphabet Before Its Stock Split

The countdown is on. Less than two weeks remain before Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) conducts a 20-for-1 stock split on July 15.

Many are no doubt mulling over scooping up shares of the technology giant before the magic date. The idea behind doing so is that Alphabet's shares could jump if the lower price attracts an influx of small investors.

That might be a winning strategy. But here are three reasons not to buy Alphabet before its stock split.

1. Near-term cash needs

Never invest cash in any stock that you could need over the near term. The definition of "near term" could vary for different people. A good rule of thumb, though, is to avoid investing money you might need within the next five years.

The last few months have clearly demonstrated why this cautious stance makes sense. The S&P 500 experienced its worst first half of any year since 1970. Alphabet is performing worse than the S&P, with its shares sinking around 25% year to date.

There's no guarantee that Alphabet's upcoming stock split will serve as a positive catalyst. Amazon also conducted a 20-for-1 stock split last month. Its shares didn't take off; on the contrary, they fell. Alphabet could very well meet a similar fate.

2. Lack of diversification

Another straightforward reason you shouldn't buy Alphabet stock before it splits is if your investments aren't well diversified. The most obvious example of a lack of diversification, in this case, would be if Alphabet already makes up a high percentage of your overall portfolio.

But you could also have much of your investments tied up in other growth stocks that have a high correlation with Alphabet's stock movements. If that's the case, buying Alphabet wouldn't help improve your portfolio diversification.

The rationale for diversification is that it lowers your overall risk. The old adage that you shouldn't put all your eggs in one basket is as relevant as ever.

3. Recession fears

If you're afraid that a recession is right around the corner, it's probably not a good idea to buy Alphabet before its stock split. The shares haven't performed well in previous recessions.

For example, during the Great Recession of 2008 and 2009, shares of what was then Google plunged more than 60%. In the brief recession of 2020 caused by the pandemic, the stock fell 23% below its previous high.

Concerns about a recession are understandable. Nearly 70% of economists surveyed by the Financial Times predict that the U.S. economy will enter into a recession next year. Some investors such as ARK Invest CEO Cathie Wood believe we're already in a recession.

On the other hand

You might have noticed that none of the above reasons really have much to do with Alphabet itself. The need for cash over the near term, a lack of diversification, and fears about an impending recession are legitimate excuses to avoid buying any stock.

I also didn't discuss the merits of buying Alphabet before the stock split versus after the stock split. No one knows what will happen as a result of the stock split because there are simply too many variables involved.

However, I can think of several compelling reasons to buy Alphabet that have nothing to do with its stock split. In particular, the company has an exceptionally strong business moat. The likelihood that any rival will knock Alphabet off its perch seems to be quite low.

Alphabet also has multiple growth drivers. Its core Google advertising business remains strong. The company's Google Cloud unit continues to deliver strong growth. And its famous "other bets" (especially its Waymo self-driving car technology business) could contribute significantly over time as well.

The reasons to stay away from Alphabet focus on the short term. But for investors with a long-term outlook, any time should be a good time to buy the stock.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Keith Speights has positions in Alphabet (A shares) and Amazon. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), and Amazon. The Motley Fool has a disclosure policy.


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