Company / Analytics

Analytics, 27 August 2022

Tesla implements a 3:1 Stock Split

On Thursday, 25th August 2022, Tesla implemented a 3-for-1 stock split, where investors were paid a stock dividend of two shares for each share held after the close of trading. The split was first suggested in June and announced earlier in the month, and was aimed at making the nearly $900 stock more affordable.

Shares ended Wednesday trading at $891 and began trading at roughly around $297 per share the next morning. This made the shares less expensive, and more accessible to a wider base of retail investors while making trading options in the stock less expensive.

Musk, CEO of Tesla, on announcing the possible split in June, reiterated that the move was intended to offer every Tesla employee the option of receiving equity in Tesla and that increasing employee satisfaction would help to maximize stockholder value.

This was the second split ever by the most valuable automotive company, with the first split coming in August 2020. Six months after the previous split, the company shares surged 36%, and investors are inevitably on the lookout for an investment opportunity with the current split.

What is a stock split, and why is it necessary for Tesla?

In the corporate equities world, A company’s board of directors can decide to divide the company’s outstanding shares into a larger or smaller number of shares. This changes the number of shares in a company, without altering shareholders’ ownership percentage in the company. For example, if a company carries out a 2:1 stock split, an investor receives 2 shares for each share owned, but at half the price for each. This effectively cuts the price per share, while maintaining the overall valuation of the company.

Stock splits can either be forward splits or reverse splits. Forward splits are the division of the outstanding shares of a corporation into a larger number of shares, similar to what Tesla implemented in August 2020 and August 2022. Reverse splits are the exact opposite, with a company reducing the number of outstanding shares while increasing the price per share to maintain the same valuation.

Tock splits are meant to put shares in a so-called comfortable range, everyday investors can more easily afford a piece of the company. According to Lindsey Bell, Ally’s chief money & markets strategist, implementing a stock split is an action “That drives more interest in the shares and more interest means more people trading the stock.”

What do we know about the previous stock split?

On August 31st, 2020, Tesla implemented a five-for-one stock split that had been announced earlier in the month on 11th August. Between these two dates, shares of the company had surged 61%, before momentarily losing 14% which was recovered in less than two months, and shooting up about 36% six months after the split.

The company’s stock split brought its previously sky-high share price of $2,230 down to a more accessible $446 on Aug. 31. The company has since gained about 200% to date, demonstrating its great profitability. Tesla also went on to break into $1 trillion in market capitalization in 2021.

What do we know about the latest split, and how has it affected the stock?

The Tesla stock started trading on a split-adjusted basis after the market close on Wednesday, with each investor gaining roughly two additional shares under the latest stock split on Thursday morning, at a price of $297 per share, down from $891 on close Wednesday night. The split was approved on August 6th by shareholders.

The Tesla stock is down about 28% year-to-date. This can be generally credited to the current equity market situation. The Nasdaq index, where tesla is traded, is down 23% year to date. However, since the company announced the stock split, the shares of the company have surged by approximately 25%. While investors’ general consensus is Stock splits don’t impact a company’s market value, evidence suggests that by making shares more affordable to retail investors, the move does often provide a short-term boost to share price, which has been the case for Tesla.

Tesla’s Q2 earnings report additionally makes a case for Tesla, with the report largely beating analyst expectations. Tesla’s quarterly revenue of $16.9 billion rose 42% from a year ago, though it fell from a record high of $18.7 billion in the previous quarter, ending the company’s streak of record profits.

Tesla going forward has high upside potential. The stock split provides an opportunity for retail investors to get into the company, with some wall street analysts expecting an eventual 25% upside on the stock because of the stock split.

While we see a clear investment opportunity, both in the short term and long term for Tesla, investors should proceed to invest with caution, and be wary of the possible risks that come with any equities investment.

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