Alphabet, the parent company of Google, is set to join the Dow Jones Industrial Average, marking a significant shift in the iconic index as it adapts to the evolving landscape of the modern economy. This inclusion, effective before the market open on Monday, will see Alphabet replace Verizon in the esteemed Dow-30. While Dow inclusion itself is not a direct catalyst for stock purchases, as institutional capital is predominantly benchmarked against the S&P 500 and the tech-focused Nasdaq 100 (both of which Alphabet already belongs to), this move signifies a broader market zeitgeist. The addition of a fifth megacap tech giant, alongside Apple, Amazon, Nvidia, and Microsoft, underscores the dominance of these technology behemoths in shaping market narratives and public perception, often amplified by broader media coverage that tends to focus on Dow components when discussing major market movements and historical downturns.
Alphabet’s entry into the Dow comes four years after its substantial 20-to-1 stock split, a strategic move that made its share price more accessible for inclusion in the price-weighted Dow index, a stark contrast to the market-capitalization weighting of the S&P 500. Notably, Alphabet, trading at a considerably higher price point, will replace Verizon, a shift that will undoubtedly amplify the impact of Alphabet’s price fluctuations on the overall Dow average due to its higher share price and inherent volatility. Year-to-date, Alphabet’s stock has surged nearly 12%, outperforming the S&P 500’s approximately 8% gain, and has more than doubled in value over the past twelve months, underscoring its robust market performance.
At its core, Google has established itself as an artificial intelligence powerhouse, a “triple threat” in the AI domain. It boasts the third-largest cloud computing service globally, a formidable AI model in Gemini that continues to bolster its dominant internet search market share, and increasingly competitive custom AI chips that are positioning it as a direct challenger to Nvidia. While we do not advocate for purchasing Alphabet solely based on this Dow inclusion news, investors seeking exposure to the AI revolution might be evaluating opportune entry points. The recent “crack” in the AI trade, fueled by concerns about the substantial AI spending by trillion-dollar market cap companies and their ability to generate commensurate returns, may present such opportunities at current valuations. Since announcing its intention to sell $85 billion in stock to fund its ambitious AI initiatives on June 5th, Alphabet’s stock has experienced a 6% decline. This week, a nascent recovery rally faltered following the high-profile departures of key AI strategists, Noam Shazeer and John Jumper, to OpenAI and Anthropic respectively, within days of each other. Both VP-level engineers were instrumental in Alphabet’s AI trajectory; Shazeer co-led the development of Gemini, while Jumper was a pivotal figure at the company’s renowned DeepMind AI research lab.
While these departures, and the subsequent uncertainty they may generate, are concerning due to the loss of significant talent and the potential for that expertise to land at a competitor, they are unlikely to fundamentally sway our long-term conviction in Alphabet. Equity offerings, while often viewed negatively due to potential dilution for existing shareholders, serve a crucial purpose in fortifying a company’s balance sheet. This approach avoids increasing debt levels and associated interest payments, while preserving cash flows. The rationale is that if these strategic investments yield the anticipated returns, Alphabet possesses the capacity to repurchase shares and effectively reverse any dilution. Conversely, if these investments falter, the dilution concerns would be secondary to more profound strategic challenges.
The long-term success of a company of Alphabet’s magnitude hinges on a multitude of factors far beyond the contributions of a few key executives. The company’s position as one of the most vertically integrated AI players globally remains a significant strategic advantage, irrespective of individual personnel changes. While we acknowledge that near-term upside may be somewhat constrained, we believe that any further weakness will present a compelling opportunity for long-term investors to accumulate positions. Employing technical analysis can provide valuable insights into optimal entry points for both new investors and existing shareholders looking to increase their exposure.
Examining Alphabet’s one-year performance chart, current levels may indeed present an attractive buying opportunity. The stock previously encountered resistance around the $343 mark before embarking on a recovery that propelled it to new all-time highs. According to the Principle of Polarity in technical analysis, former resistance levels often transform into support upon a breakout. We are currently witnessing this phenomenon as support appears to be consolidating around this former resistance level. However, given the confluence of recent unfavorable news impacting Alphabet shares, we must consider the possibility of capped near-term upside. This concern is amplified by this week’s clear breach of the 50-day moving average, a key indicator of medium-term support for many market participants. Therefore, investors considering entry at this juncture should factor in the potential for additional purchases should selling pressure persist. A critical level to monitor moving forward is the 200-day moving average, currently hovering around $313. It is important to remember that these are dynamic moving averages, and their precise dollar values will fluctuate.
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