Tesla Stock Split: Should you buy, sell or hold?

Latest Update On Tesla Stock Split August 2022

Tesla shall split its shares in the ratio of 3-for-1 on August 25th. It joins several other tech giants who had split their shares in a bid to make them more affordable to the retail investors. A 3-for-1 stock split implies that if the current share price (say) was $900, then each shareholder that holds one share shall receive 2 additional after the split. Further, the value of each share then become $300, essentially, the value of each share shall become one-third of the original value. The record date for the stock split was August 17th. This implies that only those investors who had held Tesla shares on or before August 17th are now eligible for the stock split. On August 24th, after the market closes, eligible shareholders shall receive 3 times the number of shares held prior to the stock split. From August 25th onwards, Tesla's share price shall trade at one-third of its value.

What is Tesla Inc. (TSLA) stock split all about? 

With a market share of around 70% for battery-powered electric vehicle sales in the US, Tesla stands as the industry leader. The most popular electric vehicle in the US is the company's flagship Model 3. Since its IPO in 2010, Tesla has grown significantly, earning the reputation of a gold standard along the way. The combined market capitalization of old automakers like Toyota, Volkswagen, Daimler, General Motors, and Ford is still less than that of the EV giant. Over time, Tesla has transitioned from creating unique items for wealthy consumers to producing more mass-accessible EVs for the general public. 

What is a Stock Split?

When a business splits its stock, it distributes additional shares to its shareholders at a specified ratio. Existing shareholders will hold more shares after a stock split, but the price will decline according to the stock split ratio. However, a stock split does not affect the aggregate market value of all shares. Common stock split ratios are 2-for-1 or 3-for-1, meaning a shareholder gets extra shares for the number of shares they already own. Following the split, the stock's unit price will decrease by a factor of two or three, as appropriate. In corporate announcements, stock splits are also referred to as ‘one-time special stock dividends.’ A firm may decide to split its stock more than once with the consent of its shareholders.

Tesla Stock Split: What is the ratio?

If a firm believes that the price of its shares has increased to the point where the average investor cannot purchase them, it may split its stock. Existing shareholders will now own more shares at a smaller price per share as a result of the Tesla Corp stock split.

Tesla shall divide its stock in a ratio of 3:1. On August 25th, Tesla shall split its stocks in the ratio of 3-for-1. Each share would be worth one-third of the price of a single share before the split, and each shareholder would have three times the number of shares they did previously. The investor's position in Tesla would have the same overall value. 

The rationale behind the split is that for certain investors, a stock with a single share price of around $1000 can be psychologically prohibitive. The corporation decides to split the stock into smaller shares, each of which has a lower price, as the stock can be perceived as expensive at that point. However, not all businesses adhere to this principle. For example, Berkshire Hathaway has never split its stock, even when the price was soaring. On August 19th, 2022, the closing price of a single share of Berkshire Hathaway Class A Stock (NYSE: BRK-A) was $457,650.

Tesla Corp Stock Split History

The Tesla stock split history shows only one instance of a split for Tesla. The Tesla split happened on August 31, 2020. This was a 5 for 1 split, which meant that the shareholder now held 5 shares in Tesla instead of the pre-split number of shares. A 1000 shareholding, for instance, before the split, became a 5000 share position after the split.

However, the move to split Tesla’s shares is not the only time the company has attempted to make its stock more accessible to smaller investors. In 2015, the company attempted to do a 1-for-10 Tesla reverse stock split, but the move led to a strong public outcry and a decision to abandon the plan. However, Tesla’s move to do a stock split again this time around is likely to be more successful. This is because the company’s stock has increased significantly since the last attempt, meaning that smaller investors will have to spend less to purchase shares than before.

Why is Tesla Splitting its Stock?

An increase in a company's stock price is an indicator of success. This is advantageous, but it also implies that investors will now find it more difficult to purchase the highly soaring shares. As a result, businesses may split their shares to lower the price and increase the stock's appeal to individual investors. It is common practice to divide your stock to make it look more appealing from per-share pricing to stimulate buying of the shares when a stock starts to creep up and looks costly.

Will Tesla Stock go up after the split? 

The company's great operational performance has contributed to Tesla's stock price increasing by nearly 63% to $720 since the last split. Each share would be even less expensive if the 3-for-1 split took place right now, with a new price of about $240.

Here are three reasons why the share price will probably keep rising once the Tesla stock split 2022 is complete:

• Increase in Production Capacity: Due to production limitations, Tesla has had trouble in the past satisfying customer demand for its automobiles. The lack of manufacturing capacity has actually caused the company's remarkable expansion to slow down. The building of two brand-new giga-factories, one next to Austin, Texas, and the other in Berlin, Germany, could, however, change that.

The latest additions will increase Tesla's annual production capacity from 1.05 million to 2 million vehicles. Unfortunately, the business continues to deal with problems in the supply chain for raw materials and components like semiconductors, a situation that all automakers are currently experiencing. But once it's resolved, it's anticipated that the Tesla stock charts will show a significant surge higher.

• Leveraging economies to scale: Tesla's gross margin rises as the number of cars it produces rises. Why? Due to a phenomenon called 'economies of scale.'  Tesla would incur a loss if it constructed a factory with the capacity to produce 500,000 cars but only produced 50,000 cars because it would be paying for the additional capacity but not using it. Its fixed expenses are the lowest proportion of sales once it produces all 500,000 cars, which results in a larger gross margin.

Simply put, a company's gross profit margin is its revenue (sales) less its cost of products. In the context of Tesla, the price of the car, minus the direct cost of making the car, would be taken into account by its automotive gross margin. The costs for each vehicle's basic materials would be included, but marketing and R&D expenditures, which are considered operating costs, would not be included.

Tesla's gross margin has been steadily increasing as a result of the company's record-breaking vehicle deliveries, and it is currently at the highest point in its history.

• Better margins and efficient production methods: Given how challenging and expensive it is to make automobiles, many experts thought Tesla would never become profitable. Even some of the finest automakers, like Ford Motor Company, can only manage a gross profit margin of about 15%, but Tesla has created methods for making electric cars that are at the top of the competition, and the finished product's high quality enables premium pricing.

With a gross margin of 32.9 percent, Tesla has much more flexibility for operating expenditures like the production of new goods and the development of cutting-edge new software innovations like autonomous driving, which can help the business stay one step ahead of its rivals. However, more crucially, the high margin increases revenue to the bottom line, with Tesla generating a net income of nearly $3.3 billion in the first quarter of 2022.

Tesla Stock Split Announcement: When is the right time to buy?

You shouldn't anticipate your decision to change much depending on whether you buy, hold, or sell your stock immediately before or just after the split.

A stock split is disclosed before it is carried out, so any price increase that the market anticipates following the split has already been factored into the price by the time it really happens.

There is typically little to no advantage, if any, to buy a particular stock right before a split because the market capitalization; i.e., the number of shares outstanding multiplied by the share price, or the worth of the company, remains the same before and after a split.

Hence, it can be said that since the Tesla stock split announcement, the company’s shares have been carried over with the effect of the Tesla stock split news and the majority of the impact that the split would have had has already been reflected in the stock price.

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Tesla Stock Split Announcement: What are the Implications of the Tesla Split?

There is no doubt that Tesla has had strong growth. However, it hasn't been exempt from the recent market correction. Additionally, the back-and-forth between Elon Musk and Twitter has increased stock volatility.

However, the demand for electric vehicles seems to be here to stay. Tesla has also been a pioneer in the technology needed to make electric automobiles economically viable. Recent stock upgrades came from UBS and CFRA Research. Based on the company's potential for long-term growth, CFRA Research set a price target of $1,200 per share before the Tesla Corporation stock split.

Although its growth trajectory has remained positive, the company is unlikely to enjoy the same level of growth it has in the last two to three years.  Most businesses, especially those in the technology industry, face a similar trend. At first, they expand quickly, but as more competitors enter the market, growth slows down. However, relaxed growth is still growth, and analysts generally concur that Tesla is still in a strong position to develop over the long run. But if the company's past is any guide, investors should be ready for some hiccups along the way.