Tesla (TSLA) Stock Split in 2022: Will Tesla Split Its Stock Again This Year?

Social media is full of commentators and Tesla investors predicting another stock split as soon as this year. But is it just wishful thinking?

SustainFi   Updated March 4th, 2022

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Tesla’s stock split in 2020

In May 2020, Elon Musk tweeted that Tesla’s stock price was too high, and apparently, he wasn’t joking. The stock price (pre-split) was then around $755 a share.

A few months later, in August 2020, Tesla announced a 5-for-1 stock split. Shareholders who previously owned one share would own five shares effective August 31, 2020.

Tesla shares more than doubled between Elon’s tweet on May 1st and the actual split date on August 31. They even rose 81% between the split’s announcement on August 11 and the effective date on August 31.

Although stock splits are a lot rarer than they used to be, Tesla is not alone in splitting its shares. Google’s parent Alphabet announced a 20-for-1 stock split in 2022. This is the company’s second split since its IPO in 2004. Apple announced a 4-for-1 split at the same time as Tesla.

Why do a stock split?

Stock splits increase the overall number of shares without changing the valuation of the business. In other words, the pie stays the same, but it is divided into more slices. The percentage of the pie that an investor owns before and after the split doesn’t change, but they get more slices after the split takes place.

Stock splits don’t change the company’s fundamentals, but they create the perception that shares are more affordable to average retail investors. Tesla said that the company was pursuing the split “to make stock ownership more accessible to employees and investors.”

Although some brokers like Robinhood or Public support fractional shares, letting investors buy less than one share, many still do not. Besides, investors may like the idea of buying the shares for less, even if that’s just marketing that doesn’t change the company’s valuation.

Research from NASDAQ suggests that shares outperform the market following a stock split. Just announcing the split gives shares a 2.5% boost straight away and a 5% boost in the following year, though it’s not 100% clear why. One theory suggests that more investors can now afford the stock, which increases demand and improves trading liquidity.

Another study has found that stock liquidity (or value traded) improved by 14% following the split, while intraday volatility decreased by 5%. These benefits are non-trivial.

Stock split advocates also say that splits signal confidence in the future. Stock splits happen because the stock has risen to a level that may prevent some investors from buying shares. Doing a split may imply that management believes the stock’s price will keep rising.

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Why not do a stock split?

Taking all the stock split pros into account, why doesn’t everyone do them? Amazon has never done a stock split, and Amazon shares now cost nearly $3,000 a share. And Berkshire Hathaway’s Class A shares cost a whopping $485,000 a share. Why are Warren Buffet and Jeff Bezos against making their shares more affordable to average investors?

Buffett, a big believer in business fundamentals, said that he doesn’t want to attract investors who think a split would be a good reason to buy the stock. If people buy for non-value reasons, they may sell for non-value reasons.

Since Warren Buffet likes the current shareholder base of rational value investors, why attract another class of buyers? To be fair, Berkshire did create a cheaper class of shares, Class B shares, which are much cheaper but have just 1/200th of the voting rights.

Will Tesla do another stock split in 2022?

Although Tesla shares are down from the peak, at over $800 a share they are still higher than where they were when Musk tweeted that the share price was too high. Tesla investors with large Twitter followings like Gary Black have argued that doing another split could help boost the company’s stock price just like the last time. Black even guessed Tesla’s last split shortly before it was announced.

In the meantime, Tesla investors are concerned about competition, high valuation, a rising interest rate environment, and Musk selling his holdings to meet a $10 billion tax bill. The SEC is now probing Elon Musk and his brother, Kimbal Musk, over their sale of Tesla shares.

Tesla is challenged by EV startups like Fisker and Rivian in the U.S., NIO and Xpeng in China, and established manufacturers like Ford and GM everywhere. Ford stock beat Tesla in 2021, and investors are excited about the electric F-150 pickup truck.

In the meantime, Tesla’s Musk doesn’t expect to unveil any new cars in 2022, and the Cybertruck is being pushed into 2023 on supply chain constraints. Trucks from Rivian and Ford, not Tesla, will be the first to electrify the light truck market. It also turns out that Tesla is not working on the $25,000 car Musk has previously mentioned.

In addition, investors are expecting interest rate hikes and discounting the earnings of highly valued stocks like Tesla more heavily.

Although we have no indication this time that Musk is contemplating another split, a stock split could be a way of boosting the share price again.

NOT INVESTMENT ADVICE. The content is for informational purposes only; you should not construe any such information as investment advice.

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