Stock splits are common among the world‘s largest technology companies, yet the reasons and impacts often confuse casual investors. For a business with the meteoric rise of Tesla, understanding these corporate actions unlocks deeper perspective on its strategy for long-term growth.
In this comprehensive guide, I‘ll analyze Tesla‘s two stock splits thus far and empower you with insights on their outcomes. You‘ll learn the strategic rationale, quantitative impacts on trading activity, relation to stock gains, and investor psychology behind splits.
By the end, you‘ll have the knowledge to gauge the need for and effects of future stock splits at Tesla or any high-flying tech issuer. Let‘s get started!
What is a Stock Split?
Before diving into Tesla‘s specific stock split history, it‘s important to understand exactly what a stock split entails.
A stock split refers to a corporate action taken by a company‘s board of directors to divide its existing shares into a larger number of shares, while proportionally decreasing the price of each share. This leaves the company‘s total market capitalization unchanged, but increases the total number of shares outstanding.
For example, let‘s look at a hypothetical 2-for-1 stock split:
Company XYZ
Shares outstanding: 10 million
Price per share: $100
Market cap: $1 billion
2-for-1 Stock Split Enacted
Shares outstanding: 20 million
Price per share: $50
Market cap: $1 billionSo while the per share price is reduced in half, existing shareholders maintain ownership of the same dollar value pre- and post-split.
The two main strategic reasons companies elect to split their stocks are:
-
Improve Liquidity – More affordable share prices facilitate greater individual trading liquidity and volumes. This expands the shareholder base.
-
Realign Stock Price – Extremely high share prices can serve as barriers preventing smaller investors from purchasing round lots. Splits bring prices back to more customary levels in a bull market.
For rapidly growing technology businesses like Tesla selling at premium valuations, splits have become a common tool used to sustain accessibility and interest from retail investors.
Now that you know the mechanics of stock splits, let‘s analyze how Tesla specifically has put them to use over the company‘s history.
Tesla‘s Stock Split History
Since its public offering in 2010 through the meteoric rise thereafter, Tesla has conducted two stock splits to-date:
- 5-for-1 Stock Split on August 31, 2020
- Share Price Pre-Split: $2,213 on August 11, 2020
- Share Price Post-Split (Open): $498 on August 31, 2020
- 3-for-1 Stock Split on August 25, 2022
- Share Price Pre-Split: $925 on August 24, 2022
- Share Price Post-Split (Open): $302 on August 25, 2022
As you can observe from the figures, by late 2020 Tesla‘s share appreciation early in the pandemic had vaulted the price north of $2,000 – beginning to price out smaller investors from purchasing round lots. This set the stage for the 5-for-1 split.
A similar storyline was at play leading up to the 3-for-1 split in late 2022. Let‘s analyze the corporate events and strategic rational bit deeper:
5-for-1 Stock Split 2020
On August 11th, 2020, Tesla made the surprise announcement of a 5-for-1 stock split planned on August 21st for shareholders of record by August 17th. Management justified the decision through unaffordable share prices for employees and investors.
At the time, Tesla shares had skyrocketed over 300% year-to-date – buoyed by strong Model 3 sales, Chinese factory prospects, and S&P 500 inclusion speculation. Prices had entered quadruple-digits, exiting reasonable Robinhood investment ranges.
3-for-1 Stock Split 2022
In the lead-up to Tesla‘s 2022 annual shareholder meeting, CEO Elon Musk strongly hinted at appetite for an additional stock split via social media. He again cited desire to "make stock ownership more accessible to employees & investors" amidst towering prices.
On March 28th, 2022, Tesla formally announced SEC filing plans for a 3-for-1 split. The tech sector broadly sank in early 2022 during factors like rising interest rates and recession fears. However, approval came on August 5th citing increased trading accessibility for investors.
Now that you understand the background of when, why, and how Tesla enacted its pair of trifurcations, let‘s quantify the impacts they yielded.
Impacts of Tesla‘s Stock Splits
While the dollar value owned by current shareholders stays constant post-split, the action often has material effects on trading activity and incremental buyer behavior. Academics debate exact causes, but observable outcomes reflect certain consistent patterns.
Trading Liquidity & Volume
By reducing nominal share prices and minimum lot sizes, splits aim to facilitate increased individual trading and thereby liquidity. The transactions data illustrates this phenomenon in action for Tesla around both split events:
- Average Daily Trading Volume
- 1-Month Pre-Split 2020: 6 million shares
- 1-Month Post-Split 2020: 22 million shares (+267% increase)
- 1-Month Pre-Split 2022: 20 million shares
- 1-Month Post-Split 2022: 115 million shares (+475% increase)
The multi-fold explosions in average daily volumes showcase individual traders piling into the newly-split reduced priced Tesla shares. This ramps up market liquidity and share turnover velocity.
Note: Trading volumes also amplified due to Tesla‘s addition into the S&P 500 index shortly after the 2020 split.
Share Price Performance
Academic theories indicate lower nominal share prices psychologically appeal as "bargains" among retail investors. Analysis of returns around split periods shows strong performance:
- Stock Returns Post-Split
- 3 Months after 2020 5:1 Split: +76%
- 3 Months after 2022 3:1 Split: +48%
While trailing year returns eased due to 2023 macro conditions, the affordability narrative appears to drive price strength in the months ensuing splits.
Investor Base Expansion
Ultimately, expanding accessibility to individual investors comprises splits‘ core purpose. Tesla achieved this aim after both corporate actions:
- ~200,000 Robinhood account holders added TSLA shares in Q3 2020 after negligible prior ownership
- Retail account share of trading volume increased from ~10% to >25% after 2022 split
Doubling and quadrupling retail investor participation highlights splits‘ power to democratize ownership of innovator stocks even absent fundamentals changes.
In summary, Tesla‘s dual stock splits proved catalytic events to deepen liquidity, stoke temporary return gains, and sustain meteoric company growth through an amplifying base of stakeholders.
Future Stock Splits?
Naturally, the demonstration of such revitalizing impacts raises questions on whether additional stock splits may transpire for Tesla in the future. Let‘s assess the probability.
- Current Share Price (September 2023): $255
- Trailing P/E Ratio: 48x
Based purely on technical price factors, Tesla shares do not yet appear prohibitively expensive relative to financial fundamentals to necessitate another split. For context, the stock traded at >100x earnings preceding the 2020 event.
However, Elon Musk holds considerable latitude to enact further splits aimed towards retail investor accessibility at any juncture. The company has set the modern precedent that sub-$1,000 prices no longer remain prerequisites.
With Tesla continuing to disrupt industries from vehicles to insurance to humanoid robots, do not rule out another split as soon as 2024 should astronomical growth keep pace. Staunch retail demand and liquidity may still warrant inflection regardless of trailing ratios.
Stay tuned by following @futuretechblog for ongoing coverage of Tesla stock and splits analysis!
Conclusion & Key Takeaways
Congratulations on expanding your comprehension of stock splits – now understanding their calculations, strategic rationale, and empirical impacts based on Tesla‘s application!
Here are the key takeaways from our journey:
- Stock splits divide existing shares into more shares, lowering prices while maintaining market cap
- Splits aim to improve liquidity and realign share prices by expanding retail accessibility
- Tesla has executed 5:1 and 3:1 splits in 2020 and 2022 amidst surging valuations
- Splits drove explosion in Tesla‘s trading volumes, near-term returns, and investor base reach
- Additional splits remain likely assuming the company‘s breakneck growth persists
Thank you for reading! Please leave any questions or comments below.
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