Tesla Stock Split: Why It Matters
Investors are hungry for good news after Wall Street’s abrupt start to 2022. Inflation is high, consumer sentiment has crashed and the market is slumping. Few events capture the attention of traders like a successful stock split. And while a stock split has no direct effect on a company’s underlying value, the side effects of such moves can be quite poignant.
If there’s one stock that could use a positive catalyst, it’s You’re here (TSLA -4.33%). The automaker’s annual meeting of investors will take place in early August, when shareholders will likely vote to authorize an increase in the number of shares. This would pave the way for a stock split.
Retail investors are a critical market
Tesla’s revenues and profits have grown significantly over the past decade. In 2012, the company had revenue of less than $1 billion. Fast forward to 2021, and Tesla reported total revenue of $53.8 billion. In recognition of this, investors have rewarded it with a market capitalization greater than that of the seven largest automakers combined.
Some of that value is based on the expectation that Tesla will maintain its dominance in the booming electric vehicle market, but the stock is also backed by a dedicated following of retail investors. According to Business Insider, Tesla was the eighth most-bought stock by retail investors in 2021, with $2.74 billion in net purchases that year. Tesla is consistently among the most popular stocks discussed in amateur investor forums on social media. As such, it is in the company’s interest to keep its shares affordable for small investors.
The stock also trades at much richer valuation ratios than other automakers even now. A stock split will not change this fact, but it could create the perception of a cheaper stock.
Options for investors
The decline in the stock price sets the stage for more active action in the options market. Option contracts are bought in lots of 100, so a $700 stock would require a ton of capital for a single trade. By lowering the price, this market becomes accessible to average investors.
Writing covered calls is one way to generate income through options. This is a popular move because it can generate cash from a stock that isn’t currently paying a dividend and likely won’t soon. More adventurous investors could also use put options to generate cash or hedge against a sudden downturn.
Although options have advantages, they are also quite risky and should only be used by seasoned investors.
Tesla needs a positive spark
Musk always gets a huge amount of headlines, and the coverage hasn’t been positive lately. Its highly publicized offer to privatize Twitter (TWTR -4.13%) has become a show. The inner workings of the agreement and the debate over the number of “bots”, or fake accounts, on Twitter have been very public. There is speculation that Musk is trying to negotiate a lower price or looking for an excuse to cancel the deal.
This has led Tesla investors to wonder if Musk’s shared attention will negatively affect the automaker. In the weeks following April 14, when its Twitter buyout deal closed, Tesla’s stock price plummeted.
Standard & Poor’s also removed Tesla from its S&P 500 ESG index during its reallocation in early May. While it might seem a bit odd that a major electric vehicle maker was excluded from this index, the decision was, according to Standard & Poor’s, based on social and governance factors as well as environmental factors. And while the move wasn’t a snap on most investors’ radars, Musk felt the need to react aggressively via Twitter, which quickly made the story much more meaningful. Her use of aggressive language may have been applauded by some of her fans, but she may also have left other investors concerned about the lack of professionalism.
With all the drama surrounding Tesla and its CEO, the August shareholder meeting and the possibility that it will be followed by a stock split could provide a reprieve for the company and shareholders. The stock needs a catalyst to counter the negative momentum. But even with the stock split likely underway, investors should exercise immense caution toward Tesla due to its large market capitalization, uninspired leadership and downward momentum.