Tesla completed its 3-for-1 split on Aug. 4. Splits are generally viewed as a bullish sign as they increase demand for a stock. It was Tesla's second split in just over two years. However, shares have crumbled roughly 37% since Tesla's stock split.
Tesla Stock Split: Is Now The Time To Buy?
What happened? Some of TSLA stock's selloff has to do with the rocky market. Auto manufacturing stocks have been on the decline since September as they try to navigate supply chain and production snags. Tesla's performance has also been hampered by softening demand in China. The EV maker cut prices and brought back an insurance subsidy to boost demand in that key market amid soaring production.
And of course, Elon Musk's Twitter takeover has had implications for TSLA stock as well. Analysts say there are concerns his tweets and moves could tarnish his image and thus Tesla's brand, and Tesla stock.
Tesla stock is down more than 40% on the year and approaching May 2021 lows. Share are well below their 10-and 40-week lines.
Recent passage of the Inflation Reduction Act, which includes new rules for EV tax credits, is expected to be positive for Tesla. Analysts have been raising 2023 estimates. Tesla stock is now expected to earn $12.29 per share in 2022, a dramatic 81% increase over 2021. That bullish trend paired with recent gains landed Tesla stock on the IBD 50 list of top growth stocks on Aug. 18.
What Is A Stock Split?
A stock split is when a company splits an existing share into multiple new shares. If a company splits 2-for-1, the share price will be cut in half but the number of shares will double. Firms usually do stock splits when a share price has increased substantially. The split brings down the price of the stock, which attracts a wider range of buyers. Investors who previously couldn't afford a share might now be tempted. But a split does not change the current value of the company in any way.
Reverse stock splits can be used to reduce the number of shares outstanding. Companies that are in financial trouble will often announce a reverse stock split to prop up the share price and avoid delisting. So a company trading at $5 per share can initiate a 1-for-2 reverse split, resulting in a $10 share price. If the company had 100 million shares outstanding, that number would drop to 50 million shares.
What Do Stock Splits Do To My Investment?
As an investor, the monetary value of your holdings also will be the same amount after a stock split. You'll just own more shares.
If you own fractional shares of a company, the same idea applies. If you own half a share of a company and there's a 2-for-1 stock split, your holdings would double. So you would own a whole share of that stock.
What if you own a stock, such as Tesla stock, that pays dividends? Usually any dividends after a stock split also will be reduced proportionally per share to account for the increase in shares outstanding. This leaves total dividend payments unaffected.
How Do Splits Affect Options?
Let's say you have a call option on a stock and then a split is announced. What happens next?
If you hold an options contract of a split stock your contract will be recalculated so that it's not affected by the split. It will show the new price and number of shares, but the overall value will not change. This is known as the process of "being made whole."
So in our 2-for-1 split example, an option contract that covered 100 shares with a strike price of $100 each would now cover 200 shares with a strike price of $50 each.
Splits And Stock Performance
From 2012 to 2021, stocks in the S&P 500 rose roughly 12% on average in the year following their stock splits according to data from Dow Jones. Those same figures showed that rates of stock splitting in the S&P 500 have ticked up in the last few years to their highest levels in nearly a decade.
Excessive stock splitting has been seen at market tops in the past, especially when tech stocks topped in 2000. For example, Qualcomm had a 2-for-1 stock split in May 1999. The company then declared a 4-for-1 stock split in December 1999. QCOM stock skyrocketed more than 840% after the announcement of that first stock split in 1999. Shares surged from an April 1999 price of 21 to hit an all-time high of 200 on the first trading day of 2000.
Can Splits Be A Sign To Sell?
Many investors view stock splits as bullish. But sometimes a fast series of stock splits may be a warning sign to sell.
Securities with higher prices, like Tesla stock, tend to attract investors willing to pay for quality. While that might decrease the potential pool of buyers, it tends to increase the number of smart-money sponsors that are backing the stock.
However, early stock splits often are not a problem.
Stocks can and often do move higher after initial splits, particularly when they happen early in a bull market. But problems occur when companies enact multiple big splits — say, a 2-for-1 and a 3-for-1 — within a one- to two-year period. Those interested in the Tesla stock split should note that shareholders approved a 5-to-1 split in August 2020.
Bottom Line For Tesla Stock Investors
A stock split like Tesla stock can be tempting for investors because it allows them to buy what was a previously more expensive stock at a much cheaper price. But investors should never buy a stock just because of a stock split. Make sure you do your research, check stock charts for the right time to buy, and focus on companies with top fundamentals that are leading price performers in their industry group.
If you're new to IBD, consider taking a look at its stock trading system. IBD offers a broad range of growth stock lists, such as Leaderboard and SwingTrader.
