Tesla stock split: Should you buy now or wait?
Tesla shares have soared 35% since Tesla announced a 5-for-1 stock split on August 11. The stock split occurs on Friday, August 28, and trading on a split-adjusted basis begins on August 31, 2020. Shares are currently trading above $2,000. Some investors are wondering about the implications of the stock split and whether they should buy Tesla stock now (before the split) or next week (after the split). Here is what current and potential investors need to know.
The stock split process
Tesla’s stock split process began after the closing bell on Friday, Aug. 21 (Record Date). On that day, the company makes a record of shareholders on record whose stocks will be split. Investors on record will automatically receive their additional shares after the closing bell on August 28 and any trades occurring before the closing bell are still governed by the pre-split stock price. Shares only begin trading at the new split-adjusted price on August 31. Investors should expect the stock price to be roughly one-fifth what it was before the split was finalized.
What current and potential investors need to know?
The 5-for-1 stock split will not change the value of any investor’s total holding in Tesla, it will just grow the number of shares making up that pot. A 5-for-1 stock split means that 5 additional shares of stock are issued for each share in existence on the Record Date of August 28, 2020. If as a potential investor you have a set amount of money you want to invest in Tesla, it wouldn’t necessarily matter if you bought the stock now or after the split.
Here is an example:
Assuming that as of the Record Date (August 21) you owned 10 shares of Tesla stock at a market price of $2,000 per share, the total investment in Tesla would be worth $20,000. Let’s also assume that Tesla’s stock price doesn’t move up or down between the Record Date and the time the split actually takes place (August 28).
Immediately after the split, you would own 50 shares of Tesla stock, but the market price would be $400 per share instead of $2,000 per share. Your total investment value (total holding) in Tesla would remain the same at $20,000 until the stock price moves up or down.
If you sell shares on or after the Record Date (August 21, 2020) but before the date, the split shares start trading (August 31, 2020) you will be selling them at the pre-split price. At the time of the sale, you will surrender your pre-split shares and will no longer be entitled to the split shares. Following the split, the new owner of the shares will be entitled to the additional shares resulting from the stock split.
If you buy shares on or after the Record Date (August 21) but before the day the shares start trading at the split price (August 31), you will purchase the shares at the pre-split price. Following the split on Aug. 28, you will receive the additional shares resulting from the split.
The split is expected to make a difference for smaller, individual investors who may not be able to afford a share of Tesla at the current price above $2,000 each but could afford the lower post-split price which will be just above $400.
In the past, stock splits were a bullish sign for some aggressive traders, because they might signal confidence in the outlook for the stock. But now investors can hold stocks in ETFs and many brokers offer fractional shares.
To buy now or after the split?
Tesla’s stock has been on a roller coaster this year, gaining more than 229% year-to-date, compared with gains of around 3% for the S&P 500 index. 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 trading at $2,153.17.
According to CNN Business, 31 analysts offering 12-month price forecasts for Tesla Inc have a median target of 1,475.00, with a high estimate of 2,500.00 and a low estimate of 87.00. The median estimate represents a -31.46% decrease from the last price of 2,152.00.
The current consensus among 36 polled investment analysts is to Hold stock in Tesla Inc. This rating has held steady since August, when it was unchanged from a Hold rating, according to CNN Business.
Some analysts feel that Tesla 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.
You can also read our note on Apple Stock Split which occurs on the same day as Tesla (August 28) and similarly begins trading on the post-split price (August 31, 2020).
*Note: Our articles are meant for informational purposes, and the usual disclaimer applies. *