Company / Analytics

Analytics, 13 August 2020

What does Tesla stock split mean for investors?

On Tuesday, Tesla Board approved a five-for-one split of the company’s common stock “in the form of a stock dividend to make stock ownership more accessible to employees and investors.”

The stock split is the first in Tesla’s history and comes at the back of a record year of growth for the electric car maker. Tesla stock has gained 229% this year, compared with gains of around 3% for the S&P 500 index, and better than its conventional automotive peers. The growth has seen Tesla stock price almost past the $1,500 threshold.

According to the Company:

Companies usually make stock splits as a means of incentivizing smaller, retail investors to trade in its shares. Tesla’s stated goal is to “make stock ownership more accessible” to employees and investors. The company’s shares surged 6pc to US$1,459 in extended trading Tuesday after news about the split. The Tesla stock rally has pushed Tesla’s market capitalization past $250bn while putting Musk, its chief executive, among the world’s top five wealthiest people with a net worth of around $70bn.

Tesla’s rocketing growth has come despite other automotive giants in the industry, such as Ford and General Motors facing declines as a result of the coronavirus pandemic. In its recent financial results, Tesla posted a $104m profit, its fourth consecutive quarter of profit, despite lockdown measures shutting down its California factory for several weeks. The performance will see Tesla admitted to the S&P500, and all these might have necessitated the historical stock split.

Potential implications of the stock split

According to analysts at Barron, Tesla bears will very likely see Tesla shares drop below $300, as the move will be followed by more volatility. The stock split won’t necessarily affect the company’s market valuation. However, on August 31, when it takes effect, Tesla’s share count will increase fivefold, and the price for each share will be reduced by 80%. However, the total market value of the company—and investors’ portfolios—will remain unchanged. In other words, investors won’t see the value of their total shares decline or get a boost in any way.

In the past, stock splits were a bullish sign for some aggressive traders, because they might signal confidence in the outlook for the stock. A lower share price meant more retail investors could afford the stock since it’s easier to afford a $300 stock compared with a $1,500 stock.

Today investors can hold stocks in ETFs and many brokers offer fractional shares. Fidelity, for instance, lets investors buy a portion of many stocks for as little as $5.

Investors are waiting for a decision by the S&P500 to include Tesla in the benchmark. The split won’t impact the S&P 500 decision, which is a market-capitalization-weighted index and the absolute share price doesn’t matter.

How the stock moved?

Tesla’s stock has been on a roller coaster this year. Back on the first trading day of 2020 (January 2), the stock opened at $424 a share. By March 18, it had fallen to $350. But by July 20, it hit an all-time high of $1,650 a share. As of the time of this writing, Tesla is at a respectable $1498,00, an increase from the $1,461 it was trading after the split was announced.

So, should you buy Tesla share now or wait until the stock split? That’s up to you and your level of risk, and if you think the stock will be more valuable or cheaper than it will be after August 31. It’s important to note, however, that some analysts feel Tesla’s stock is significantly overvalued at the moment. In a roundup of analysts on July 16, Barron’s found that most think the stock is currently trading way above what the actual value should be.

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