What The Tesla Stock Split Means For Investors

Key takeaways

• This lower price per share makes the company’s stock more attainable for retail investors, who will hopefully buy shares and increase the overall value of the company.
• Investors often react strongly to stock splits in the short term, you can’t forget that investing is about assessing the performance of the business.
• Amazon, Google and Shopify also had stock splits in 2022.

You may have heard about the Tesla stock split that just happened. (Yes, another one.) The electric vehicle maker had another stock split on August 24, 2022. One week on, let’s take a pause to reassess.

The Tesla stock split has garnered interest from retail investors and folks who have been watching the market closely. In addition, the recent Inflation Reduction Act has placed more attention on the electric vehicle (EV) industry as experts attempt to determine how the allocation of funds will work.

With Tesla being the sixth largest company in the world and the U.S EV market relying heavily on its success, there’s justifiably been plenty of discussion about this stock split. So we’re going to look at the Tesla stock split to determine if it changes the value of the stock, and give you what you need to know about it moving forward.

How stock splits work

First, let’s review how stock splits operate. The company’s board of directors divides its stock to increase the number of shares that they have outstanding. As a result, a single share goes down in price since it’s now worth a smaller portion of ownership in the company. It’s like cutting your slice of pie into smaller pieces.

This lower price per share makes the company’s stock more attainable for average investors, who will hopefully buy shares and increase the overall value (market capitalization) of the company, which should make the price per share go up again.

Why do companies bother with a stock split?

The main benefit of a stock split is that the lower share price appeals more to investors who may have been priced out of investing in the company previously.

While fractional shares are becoming more popular, many investors are still intimidated by a high price per share or prefer to own whole shares.

A company will also do a stock split to increase liquidity, making the share price more attractive for retail investors. When a share price is lower, it’s more appealing to everyday investors who are likely to trade more often.

Tesla stock split timeline

What’s the exact timing of the Tesla stock split? The Tesla stock split was rumored for many months in advance. On August 4, 2022, Tesla’s shareholders approved the 3-for-1 stock split during the company’s annual meeting. However, the idea of the stock split was floated initially in a tweet earlier in the year on March 28. Once the buzz started to build, there eventually had to be a shareholder vote to make the stock split official.

In a proxy filing from earlier this year, Tesla claimed that the reason for the stock split was to offer every employee the option of receiving equity and to reset the market price. By resetting the market price, more employees and investors would have the opportunity to invest in Tesla once again.

The release from Tesla specifically stated:

“Since our stock split in August 2020 to June 6, 2022, our stock price has risen 43.5%. While this value appreciation has led to our employees benefiting enormously through the years, we want to make sure all employees, no matter when they join, have access to the same advantages.”

The release also communicated that Tesla wanted to offer its employees more flexibility in managing their equity, which they felt may help maximize shareholder value on top of making the common stock more accessible to retail shareholders.

The stock split occurred after the market closed on August 24, 2022. Shares of TSLA shut at $891.29 when the market closed that day. Shares were trading at about $302 after the market opened on August 25th. The stock closed at $288.09 on August 26th. The stock currently has a one-year target price of $306.10.

It should be noted that Tesla had a stock split a few years ago. Tesla stock went through a 5-for-1 stock split in August 2020. So this is the second Tesla stock split in just two years as the electric vehicle maker continues to dominate the market.

Does a stock split mean a stock’s price will go up?

With a stock split, the board of directors hopes the stock price will go up since the shares are now more affordable for retail investors. When the shares become more affordable, there’s usually more interest in the stock, which leads to more trading. When more people are willing to buy and sell Tesla stock actively, the stock becomes more liquid, so you can trade it for a decent deal without impacting the price.

Many will argue that a stock split doesn’t influence much aside from making the price of a share more attainable and less intimidating to the average investor. The value of a company will still depend on cash flow and revenue, along with other external macroeconomic and global political factors. (As we’ve all experienced in 2022, many global factors can cause market volatility that impacts the entire stock market.)

There are no guarantees that a stock split will always make the company’s shares go up in value. In the short-term, a stock split leads to investor interest and momentum since average investors can now invest in a company that was previously too expensive. In the long run, the value of the shares will typically come down to reflect actual performance.

As a shareholder, you don’t automatically see an increase in your investment portfolio due to the stock split. The value of your shares won’t go up. You just own more shares at the lower price now. So instead of owning one share at $900, you would now have 3 shares at $300 (These are hypothetical numbers, rounding for simplicity.)

It’s worth noting that the value of a company in the stock market is determined by market capitalization, which is the combined value of all of the company’s shares. The simple market cap formula is then calculated by multiplying the price of one share by the number of total outstanding shares. The stock split will change the price and number of shares, but the market capitalization isn’t instantly adjusted. Instead, the goal is for the new value of the shares to eventually increase the total market capitalization.

Only time will tell how this Tesla stock split will impact the company's market cap. It’s going to be interesting to see how the stock market reacts to Tesla in the next few months.

Other notable 2022 stock splits

There were a few other major stock splits in 2022. Tesla isn’t the only company that went through a stock split this year.

Amazon (AMZN)

Some experts considered this the most noteworthy stock split of the year. Amazon had a 20-for-1 stock split at the end of the market close on June 2. This stock split led to a share of Amazon selling for less than $1,000 for the first time since 2017.

Alphabet (GOOG)

Alphabet (the parent company of Google) went through a 20-for-1 stock split after the market closed on July 15, 2022.

Alphabet presently dominates the global search engine market since Google’s share is about 80%, and the company brings in billions in revenue through Youtube’s advertising arm.

Shopify (SHOP)

Amazon wasn’t the online e-commerce giant to go through a stock split in 2022. Shopify completed its 10-for-1 stock split on June 29. While online shopping portals like Shopify benefited from online consumer spending during the pandemic, many experts are worried about how inflation and changes in consumer spending will impact this company.

If you’re curious about the impact of stock splits, you may want to take some time to look at these companies' stock charts to track the share price performance before and after the split.

As crucial as these large-cap stock splits were in 2022, we still have to watch how the market reacts and if there’s any optimism regarding inflationary pressures loosening up. Moreover, we can’t ignore the role of political and external factors, from new government policies to global conflicts, that could impact the overall stock market in 2022.

Bottom Line

While looking at stock splits is exciting, we can’t ignore the fundamentals of investing or get too caught up in the hype of announcements. So while investors often react strongly to stock splits in the short term, you can’t forget that investing is about assessing the performance of the business. You want to invest in companies that are doing well and generating strong financial returns for shareholders.

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