Dow inclusion is not a reason to buy Alphabet. But these other reasons may be
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CNBC Finance
6 min read
Another megacap tech stock has been tapped to join the Dow Jones Industrial Average , as the symbolic stock gauge continues to evolve to reflect the driving forces of the new economy. Google-parent Alphabet will become one of the Dow-30 stocks before the open on Monday, replacing Verizon . Dow inclusion is not a reason to buy a stock because the money benchmarked to the broader market is tied to the S & P 500 or the tech-heavy Nasdaq 100 (Alphabet already belongs to those indexes). That means there won't be much forced fund buying tied to joining the Dow. But, putting a fifth megacap in the Dow to join Apple , Amazon , Nvidia , and Microsoft does serve as a zeitgeist moment for the market, as much of the Wall Street coverage outside financial media focuses on the Dow. There is also a history of measuring some of the biggest downturns in terms of Dow moves. The Alphabet nod comes four years after the company's 20-to-1 stock split, which made the share price more palatable for inclusion in the price-weighted Dow. (The S & P 500 is market-cap weighted.) It is notable that Alphabet, which trades at $350 per share, is replacing Verizon, which trades around $46. That means that the ups and downs of Alphabet, which by nature of its much higher share price and higher volatility, will mean more to the overall average. Shares of Alphabet are up nearly 12% year to date, beating the S & P 500's nearly 8% advance. Zooming out, the stock has more than doubled over the past 12 months. Google has become an artificial intelligence triple threat, boasting the world's third-biggest cloud computing service, a strong AI model in Gemini that has enhanced its dominant internet search share, and its custom AI chips are increasingly being seen as competition for Nvidia . While we don't advise buying Alphabet on the Dow inclusion news, investors who want to own it for its leading role in the AI revolution might be wondering at what levels would be most opportunistic. (We have a buy-equivalent 1 on the stock and a $400-per-share price target.) The recent crack in the AI trade, on concerns about how those multi-trillion-dollar market cap companies are going to be able to get returns on their massive AI spending plans, might open the door at current levels. Since June 5, when Alphabet unveiled plans to sell $85 billion worth of stock to cover a chunk of its planned AI spend, the stock has dropped 6%. This week, a recent recovery rally stalled after the departures of Noam Shazeer to OpenAI and John Jumper to Anthropic, which took place within only days of each other. Both of the VP-level engineers had played key roles in Alphabet's AI strategy: Shazeer in his role as co-lead of Gemini and Jumper as a key figure at the company's DeepMind AI research lab. Those two factors are not enough to sway our conviction in the Alphabet stock. Equity offers are generally looked down on due to the dilution they bring to existing shareholders. However, the move does serve to protect the balance sheet as it means no increase in debt levels or interest payments, as well as cash flows. Yes, we get diluted â but if the investments work out, then Alphabet can always rebuy the shares to undo the dilution. If the investments don't work out, well, we've got bigger problems on our hands than a couple of percentage points of shareholder dilution. Key executive departures are concerning not only because of the loss of talent and experience, but also because all that ends up at a competitor. That said, the success of a company as large as Alphabet, over the long-term, is about far more than the talents of a few key executives. For example, their departures do not change the fact that Alphabet is one of, if not the most, vertically integrated AI companies in the world. While we understand that upside may be limited for now, we still think further weakness will prove a good opportunity for long-term investors to step in. As we often do, we can use technical analysis as a gut-check on entry points â either for new investors or for current shareholders who want to get bigger in the name. Alphabet 1-year performance Looking at Alphabet's chart, we may now be at a buy level. As we can see, shares previously topped out at around $343, before pulling back, then mounted a comeback that saw them break out to new highs. When you get a breakout, the old high (which previously acted as resistance) is then looked to for support, based on what technical analysts refer to as the Principle of Polarity. We are seeing that playout now in real time as support has clearly come in at this level to support the stock. However, given the convergence of sub-optimal news hitting shares of Alphabet these past few weeks, we have to consider that near-term upside may be capped. That's even more true given this week's move clearly violated the 50-day moving average (red line), which many look to as a level of medium-term support. So, should you step in here, be sure to leave room for additional buys should the selling pressure continue. The next level to be mindful of is the 200-day moving average (yellow line) at about $313. Remember, these levels are moving averages, not fixed dollar amounts; so, the prices are simply where the moving averages currently stand. (Jim Cramer's Charitable Trust is long GOOGL, AAPL, AMZN, MSFT, NVDA. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. 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