Any investor who has purchased or has considered purchasing shares of Google and YouTube parent company Alphabet Inc. (ticker: GOOG, GOOGL) in recent years has likely noticed there are two paths to take. Tickers GOOG and GOOGL both represent shares of Alphabet common stock, but they are two distinct share classes that have slightly different prices and attributes.
Most publicly traded stocks have only one class of common stock, but there are plenty of examples other than Alphabet of companies with multiple share classes. There are several reasons why a company might prefer multiple share classes, but the most common reason has to do with founders and company insiders maintaining control over the company.
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If you’ve wondered what exactly the differences are between GOOG and GOOGL and which stock is the better investment, here are some factors to understand and consider before buying:
— Why companies use multiple share classes.
— Differences between GOOG and GOOGL.
— Other examples of multiclass stocks.
Why Companies Use Multiple Share Classes
One of the downsides for company founders and insiders when they take a company public is that they risk losing control over the company. When a company completes an initial public offering, its public shareholders become part owners of the company. Founders and executives often attempt to maintain a majority ownership of the company even after they complete an IPO.
Each time a public company raises capital via an IPO or secondary offering of new shares, however, company insiders can lose more and more control over the company to dilution. In a private company, founders and executives can take a company in any direction they want. In a public company, all major decisions are made either directly or indirectly via shareholder vote. For most public companies, each share of common stock comes with the right to place one vote when the company elects board members, approves policy changes, issues new securities or participates in merger and acquisition deals.
A company’s founders and board members often make recommendations on how its shareholders should vote on any given issue, but shareholders are not obligated to follow those recommendations. At the end of the day, the only sure way for company insiders to maintain control of a company is to secure slightly more than 50% of its voting rights.
If each share of a company’s common stock represents one vote, insiders need to own more than 50% of the company’s total shares. Alphabet and other companies that have multiple common stock classes often structure the different classes so that certain classes have more voting rights than others. By doing so, insiders can maintain control over shares that have more voting rights while selling shares with less voting rights to public investors.
Differences Between GOOG and GOOGL
When Google first went public in 2004, the company created two classes of common stock. Google sold shares of its Class A stock to the public. Google co-founders Larry Page and Sergey Brin, along with other Google executives, retained Class B shares. At the time, each share of Google’s Class B stock held 10 times the voting rights of each share of Class A stock. This share structure allowed Alphabet insiders to maintain majority voting rights even if they did not maintain majority ownership of the company.
In 2014, Google underwent an unconventional stock split that created a third common stock class. Google completed a 2-for-1 split of its public Class A stock and created a new Class C stock that had no voting rights whatsoever. At the time, Page and Brin created this new stock class because they were concerned Google’s stock issuance related to acquisitions and executive compensation would eventually erode their majority control of Google’s voting rights.
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After the split, Google’s Class A shares that came with voting rights traded under the new ticker GOOGL. The new Class C shares that had no voting rights took over the GOOG stock ticker.
In 2015, Google restructured its business and changed its corporate name to Alphabet, but the restructuring did not affect the company’s three share classes. A subsequent 20-for-1 Alphabet stock split in 2022 did not change the company’s share classes or ownership structure either.
As of Jan. 23, Alphabet had 5.89 billion shares of Class A stock outstanding, 869 million shares of Class B stock outstanding and 5.67 billion shares of Class C stock outstanding. Due to the company’s incorporating documents, as well as Delaware law, all classes of stock are perfectly equal except with regards to voting, so the varying levels of shares outstanding don’t result in varying earnings per share for each class. As of Dec. 31, 2023, Page and Brin collectively owned 86.5% of the Company’s Class B shares, and the two founders’ shares represent 51.5% of Alphabet’s total voting rights. That proportion is no coincidence, as it gives them the ultimate say in the company’s decision making, so long as the two of them are on the same page.
For the average investor, there’s not much practical difference between owning shares of GOOG and GOOGL. Both share classes represent an equal ownership stake in Alphabet. GOOGL shareholders get voting rights associated with their shares and GOOG shareholders do not, but company insiders still control the majority of voting rights and can still override the votes of even a 100% consensus among Class A public shareholders.
The market doesn’t assign much value to Alphabet’s voting rights at this point. GOOG shares without voting rights usually trade at a price that closely follows GOOGL shares that have voting rights.
Other Examples of Multiclass Stocks
Alphabet isn’t the only popular public stock that has multiple share classes.
Facebook and Instagram parent company Meta Platforms Inc. (META) has public Class A shares that trade on the Nasdaq exchange and Class B shares owned by CEO Mark Zuckerberg and several other company insiders. Not surprisingly, the Class B shares come with 10 times the voting rights of the publicly traded Class A shares.
Warren Buffett’s Berkshire Hathaway Inc. (BRK.A, BRK.B) also has two classes of publicly traded shares. Berkshire’s Class B shares (BRK.B) carry 1/1,500th the equity ownership of Class A (BRK.A) shares but only 1/10,000th the per-share voting rights.
Media giant Comcast Corp. (CMCSA) has Class A shares that trade publicly on the Nasdaq, but it also has Class B shares controlled by CEO Brian Roberts that represent 33.3% undilutable ownership in the company. In other words, no matter how many shares of CMCSA stock the company issues, Roberts will still control a third of the company’s voting rights.
Zoom Video Communications Inc. (ZM) also has Class A stock that trades publicly on the Nasdaq and Class B shares held by company insiders that come with 10 times the voting rights.
Which Is the Better Investment, GOOG or GOOGL?
For the average retail investor mulling which class of Alphabet shares to buy, the answer at this point is simple: It really doesn’t matter.
Investors who want voting rights should buy Alphabet’s Class A GOOGL shares, but they should understand that those voting rights have limited potency, given Page, Brin and other insiders still control a majority of the total voting rights. GOOG shares and GOOGL shares represent equal ownership stakes in Alphabet, and the two tickers should continue to trade in tandem over time.
In terms of which share class is the better investment, there really is no meaningful difference from a performance standpoint. As of Jan. 30, GOOG shares were up 56.25% over the past year, while GOOGL shares were up 56.24% over the same period.
At the close of trading on Jan. 30, the non-voting GOOG shares actually traded at a 1% premium to the GOOGL shares, which do have voting rights. It makes sense for investors to simply buy shares of whichever class of stock is cheaper at a given moment in time, which currently gives GOOGL stock a slight edge.
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GOOG vs. GOOGL: Why 2 Classes of Alphabet Stock? originally appeared on usnews.com
Update 01/31/24: This story was previously published at an earlier date and has been updated with new information.
