Why Tesla’s planned stock split is a “good thing for the retail investor”

Jesla could soon be the last big tech company to split its shares.

On Monday, the company announced plans to seek shareholder approval for an increase in its stock count at Tesla’s upcoming annual meeting, according to a filing with the Securities and Exchange Commission. The approval would allow the automaker to split its shares, the filing said.

Shares of Tesla, which also announced the stock split plan via Twitterjumped more than 7% on Monday morning following the announcement.

The company did not say what the ratio would be for the stock split, or when the split would take place.

“You’re probably looking for a little time” on the timing of the split given that Tesla has yet to set a date for its annual meeting, says Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. (Last year’s meeting was in October.)

Tesla split its stock 5 for 1 in 2020, around the same time Apple also split its stock. Amazon and Google’s parent company, Alphabet, recently announced approval of stock splits.

What would a stock split mean for Tesla?

A stock split does not affect the value of the shares held by investors.

But it does mean that a single share of a company becomes more affordable. Tesla’s stock price is currently hovering around $1,000 per share. A 2-for-1 stock split would bring the price of a single stock down to around $500, while a 5-to-1 split would bring the price down to nearly $200.

“A stock split for a company with such a high share price per share is always a good thing for the retail investor,” says Seth Goldstein, senior equity analyst for Morningstar. “With Tesla trading near $1,000 a share…it’s a bit difficult for all of the retail investors to come in and buy a stock.”

A stock split will encourage more retail investors to consider Tesla, he adds.

Tesla’s stock price took off immediately after its stock split in 2020.

Why are Google and Amazon doing stock splits?

In 2020, Apple adopted a 4-to-1 split, and earlier this year Amazon and Google won approvals for massive 20-to-1 splits.

“Boards are now preoccupied with share price,” says Silverblatt. “It’s definitely a turnaround and not the way things were going. Decades ago they cared, then they didn’t.

Investors can now buy fractional shares through trading apps like Robinhood and more traditional brokerage firms like Charles Schwab and Fidelity. That means you can own a few dollars worth of Tesla stock instead of having to buy a whole stock for nearly $1,000.

Even so, companies now want to make their stocks more affordable and attractive to retail investors, says Silverblatt.

Stock splits have also been seen as ways for companies to potentially gain access to the Dow Jones Industrial Average, a price-weighted index that could top if these big tech companies were added to their pre-split prices.

Is Tesla stock a good buy?

Goldstein says Tesla stock is overvalued and not necessarily a good buy right now. His current fair value estimate is $700 per share for Tesla.

While there’s a lot of excitement about Tesla CEO Elon Musk opening a new factory in Berlin, Germany, Goldstein says he’s already taken that opening into account when determining its value estimate and its delivery forecasts for 2022, which are just over 1.5 million vehicles in the year.

“Longer term, I still think Tesla will see growth slow as more electric vehicles come out and are sold to consumers, and as EV technology from other traditional automakers catches up to Tesla slightly,” Goldstein says. (EV stands for electric vehicles.)

Tesla did not immediately respond to Money’s request for comment.

In short: if and when Tesla splits its stock, the split itself doesn’t mean you should immediately walk out and buy stock.

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