Tesla is doing the splits—again. For the second time in two years, Elon Musk’s electric car manufacturer is splitting its stock.
When the market closes today, Aug. 24, Tesla will execute a 3-for-1 stock split, which was approved by shareholders earlier this month. It comes almost exactly two years after the last such move, a 5-for-1 split, that helped bring the financial practice back in style.
Tesla is one of the most popular stocks for retail traders, who hold about 40% of its shares, according to data from FactSet. And splitting stock—while a largely semantic maneuver—has psychological appeal for retail investors.
Why do companies split their stock?
When a company splits its stock, it changes nothing about its business fundamentals. It’s just simple multiplication and division. Take Tesla: After the bell on Aug. 24, the company will multiply each shareholder’s holdings by three while dividing its stock price by three. As such, Tesla stock will fall from about $900 per share to about $300 per share when the market opens on Aug. 25.
The value of shareholders’ stakes will remain the same, but stock splits can be an effective way to make buying a stock appear to be a cheaper proposition.
In the last few years, a number of big consumer-facing companies have executed stock splits including Apple, Amazon, and Google.
Does stock splitting work?
In anticipation of a stock split, retail purchases typically increase. Tesla stock has risen nearly 13% in the past 30 days, though that’s also attributable to the passage of a landmark US climate bill that gives tax credits to electric car buyers.
The financial data firm Vanda Research found that buying often surges between the announcement and execution of a split, but many investors also sell following the split.
That seems to be the case in the run-up to Tesla’s split as well. In the past five days, Vanda reported, Tesla trailed only Apple in net retail purchases with everyday investors buying $313 million of the stock.
“In typical buy-the-rumour, sell-the-news style, investors tend to drastically scale back purchases of splitting stocks in the weeks ensuing the effective split date, causing price momentum to slow,” the firm wrote in a recent newsletter. “After witnessing this dynamic across several other tech giants over the past couple of years, we believe this time will not be different for TSLA.”
Tesla (TSLA) shares are set to split for the second time in the past two years. The electric vehicle maker had been proposing a possible split since early this year, which was approved by shareholders during the company's annual meeting on August 4, 2022.
The shares are to be split on a 3-for-1 basis, meaning investors will receive an additional two shares for each one they already own. The company's last stock split was on a 5-for-1 basis in August 2020.
The Tesla stock split took place after the market's close on August 24.
The split won't affect Morningstar's view on the company, which senior equity analyst Seth Goldstein values at $760 per share. After the split, the company's fair value estimate will be adjusted to about $255 per share to account for the increase in the company's outstanding share count, according to Goldstein.
The company's Morningstar Economic Moat Rating of narrow, which means it has a competitive advantage versus their rivals, will be unaffected by the split.
Tesla's stock will also keep a Morningstar Rating of 3 stars following the split, but at a slight premium of 14% as of August 23, which is still within a range that Goldstein views as fairly valued.
The company's shares rallied in the past few weeks on news that an agreement was reached to pass the Inflation Reduction Act, which was signed into law by President Joe Biden on August 16.
"Tesla could work with suppliers to incentivize the buildout of processing plants in the U.S., but this would likely take years before the company could secure enough battery materials for the majority of its vehicles to qualify,'' Goldstein says.
Other Stock Splits
Tesla is one of several tech and consumer companies that have set out to split their shares this year. Market leaders Amazon.com (AMZN) and Alphabet (GOOG) (GOOGL) have already split their shares in the past few months. Cybersecurity firm Palo Alto Networks (PANW) will split its stock on September 14 on a 3-for-1 basis.
Updated August 14, 2022 / Original August 12, 2022
Tesla has given investors something to look forward to this coming week: a three-for-one stock split. As of the close of trading on Aug. 24, Tesla shareholders will get a “dividend” of two extra shares. The next day, Tesla stock will start trading at the new price—a third of what it used to be.
That may amount to little more than cutting the pizza into more slices, but individual investors often chow down on bite-sized pie. One study found that stocks announcing splits typically beat the market by 16 percentage points over the next 12 months.