Following in the footsteps of US tech giants, Amazon and Google, who completed stock splits earlier this year, Tesla is launching its own 3-for-1 stock split before the US markets open on 25 August.
While the recent Twitter deal drama seems to make CEO Elon Musk sell another US$6.9 billion worth of his stake, will the stock split offer any opportunities to further boost the EV maker’s share price? And what does this mean to new investors and existing shareholders? Is it a good time to become a Tesla holder? Here are some of the key questions on everyone’s mind:
First thing’s first: What is a stock split and why do companies do it?
A stock split essentially multiplies the number of shares outstanding in a company. It doesn’t create new shares out of thin air but divides its existing shares into additional shares. After a stock split, a shareowner will end up with more shares that add up to the same price. It doesn’t change the company’s market capitalisation, it just lowers the individual share price and makes it more affordable for the average investor to buy them. Plus, markets have time to react to the news after the stock split announcement, which often happens a few months ahead of the actual event.
What will happen to Tesla’s share price after the stock split?
In the case of Tesla and its 3-for-1 stock split, the share price will be one-third of the current market price. For example, based on Tesla’s price of US$890 per share at market close on 19 August, a shareholder would get the price of US$296.67 per share by dividing $890 by 3 after the stock split. And at the same time, the current shareholders will receive an additional two shares at $296.67, which equals the market value of their previous holdings. This stock split will increase the number of outstanding shares in the market by three.
Who will be eligible for the additional shares?
Shareholders who bought Tesla’s shares before or on the record date of 17 August qualify for the additional two shares, as are investors who buy Tesla shares before 24 August. Shareholders who sell Tesla shares after 17 August will not be eligible for the offer. In short, if you were a shareholder before 24 August, you will be credited with an additional two shares when markets open on 25 August at one-third of the market pricing of the market price at close on 24 August.
Will the stock split boost Tesla’s share price?
This isn’t the first time Tesla completed a stock split. During its first back in 2020, Tesla’s share price went up about 80% from the announcement date on 11 August to the distribution date on 31 August. But the adjusted shares price fell as much as 34% during the week after the distribution date. However, since then, the year-end market cap has increased by as much as 150%.
Tesla’s share price was at $677 on the date the stock split was announced, and since then the price has surged by 30%. Investors in Tesla will see this as an important reference point: while a share split may not boost the price immediately as markets have already had time to react, share prices are likely to trend up in the longer term.
So, is Tesla going to retain its growth stock status?
Tesla is a leading component in the US growth stocks, with a 1.69% weighting in the S&P 500. The company makes up one-fifth of the Consumer Discretionary Select Sector SPDR (NYSEArca: XLY), which is one of the leading growth sectors in the SPX. The US equity markets rebounded about 16% from the year-low back in June, with Consumer Discretionary stocks leading gains of 26%, while Tesla stocks rebounded nearly 40% during the same timeframe. The market trajectory now is still on course for a bottom reversal.
Tesla reported a quarterly decline in revenue and earnings for the second quarter due to supply chain disruptions. But the EV maker still grew 42% in its revenue on a yearly basis. Tesla has reached a milestone of producing 1 million cars in its Shanghai Gigafactory as of 13 August, as posted by CEO Elon Musk on Twitter. As demand outpaces supplies for Tesla’s electric cars, an increase in production usually leads a profit and revenue growth.