Tesla Stock Split: Is Now the Time to Buy?
Tesla (TSLA) shareholders approved plans for a 3-for-1 stock split on August 4. Shares outstanding will increase to 4 billion to complete the Tesla stock split. The vote took place at Tesla’s annual shareholder meeting — called the Cyber Roundup — at Tesla’s factory in Austin, Texas. Tesla’s stock split is seen as a way to increase demand for its stock.
In July, Tesla reported a better-than-expected Q2 profits. The stock jumped 10% the next day. They continued to climb ahead of the expected Tesla stock split news. On July 8, Tesla shares climbed above the 50-day moving average for the first time since early May. It is now trying to break above its 200-day line, but is meeting resistance there. The stock is still well below previous highs.
Tesla shares fell 6.6% on average volume the day after the Tesla stock split vote. Stocks are currently not in a proper place to buy. On the daily chart, shares are in a long consolidation with a buy point at 1,208.10, according to MarketSmith graph analysis. A tight trading range around current levels could potentially create an alternative entry for aggressive traders, but the stock needs more time.
What is a stock split?
A stock split is when a company splits an existing stock into multiple new shares. If a company splits 2 for 1, the stock price will be cut in half, but the amount of shares outstanding will double. Companies usually do stock splits when the stock price has increased significantly. The split lowers the share price, which attracts a wider range of buyers. Investors who previously couldn’t afford equity may now be tempted. But the split does not change the current value of the company in any way.
A reverse stock split can be used to reduce the number of shares outstanding. Companies in financial difficulty often announce reverse stock splits to support the stock price and avoid a delisting. So a company trading at $5 per share could initiate a 1-for-2 reverse split, resulting in a share price of $10. 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 cash value of your holdings will also be the same amount after a stock split. You will simply own more shares.
If you own fractional shares of a company, the same idea applies. If you own half of a company’s stock and there is a 2-for-1 stock split, your holdings will double. So you will own an entire share of these shares.
What if you own stocks that pay dividends? Generally, any dividends after a stock split will also be reduced pro rata per share to account for the increase in shares outstanding. This leaves total dividend payments unaffected.
How do splits affect options?
Let’s assume you have call option per share and then a split is announced. What happens next?
If you own a split stock option contract, your contract will be recalculated so that it is not affected by the split. It will show the new price and number of shares, but the total value will not change. This is known as the process of “becoming whole”.
So in our 2-for-1 split example, an option contract that covered 100 shares with a strike price of $100 each will now cover 200 shares with a strike price of $50 each.
Split and presentation of shares
From 2012 to 2021, stocks in the S&P 500 rose an average of about 12% in the year after their stock split, according to Dow Jones data. Those same numbers showed that stock split levels in the S&P 500 have risen over the past few years to their highest levels in nearly a decade.
Excessive stock splitting has been seen at market tops in the past, especially when technology stocks peaked in 2000. For example, Qualcomm (QCOM) had a 2-for-1 stock split in May 1999. The company then announced a 4-for-1 stock split in December 1999. QCOM shares skyrocketed more than 840% after the announcement of that first stock split in 1999. The stock jumped from a price of 21 in April 1999 to an all-time high of 200 on its first day of trading on 2000
Could the split be a sell sign?
Many investors believe that the stock split is bullish. But sometimes a quick series of stock split may be a warning sign to sell.
Stocks with higher prices tend to attract investors willing to pay for quality. While this may reduce the potential buying audience, it tends to increase the smart money backers backing the stock.
However, early stock splits are often not a problem.
Stocks can and often do rise after initial splits, especially when they occur at the beginning of a bull market. But problems arise when companies take multiple large splits — say, 2-for-1 and 3-for-1 — within a one- to two-year period. Those interested in Tesla’s stock split should note that shareholders approved a 5-for-1 split in August 2020.
Bottom line for investors
Stock splits can be tempting for investors because it allows them to buy what was previously more expensive at a much lower 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 the best fundamentals that are price leaders in their industry group.
If you’re new to IBD, consider checking it out stock trading system. IBD offers a wide range of growth stock listslike ranking and SwingTrader.
YOU MAY ALSO LIKE:
IBD’s Investment Podcast: Exclusive trading tips and market insights
Find compelling growth stocks with IBD’s Stocks of the Day
Catch the next big winning stock with MarketSmith
Get Free IBD Newsletters: Market Preparation | Technical Report | How to invest