Wall Street and the investment community have been dealing with a difficult year in 2022. Since the beginning of the year, the norm has been Standard & Poor’s 500 Focus on technology Nasdaq Composite Both entered bear market territory, the US inflation rate rose to a 40-year high of 9.1% in June, and the US economy successively recorded a quarter of a decline in GDP, indicating a “technical stagnation”.
However, in the midst of this chaos, investors have been drawn to what is arguably the silver lining this year: a stock split. A stock split allows a publicly traded company the ability to change its share price and the number of outstanding shares without affecting market value or operations.
According to data from Fidelity, 212 companies have announced public and/or cent stock splits since the beginning of the year. That includes one of the largest and most popular stocks on the entire planet, the electric vehicle (EV) manufacturer. Tesla (TSLA -0.84%). With a Tesla stock split fast approaching, here are five things investors should know.
1. When Tesla stock is forked
Perhaps the most relevant data investors should know is when exactly Tesla stock will be split. The answer is exactly one week from today, on August 25, 2022 before the market opens.
Keep in mind that sometimes it can take stock quotes and online brokerages from a few hours to an entire day to realize that a stock split has occurred. If you wake up and suddenly find that your investment portfolio lost a significant amount of value overnight, or that Tesla stock fell 60% or more on August 25, there is very Good opportunity to ignore this as a reporting error that will be quickly addressed by the provider.
2. The size of the Tesla stock split
The second important anecdote of information that current and potential Tesla investors should know is the size of the stock futures split.
In June, Tesla proposed activating the 3-for-1 front split. Effectively, this would reduce the company’s share price to one-third of its current value while increasing the company’s outstanding shares threefold. At a shareholder meeting on August 4, Tesla shareholders voted to approve the company’s proposed split.
Based on Tesla’s closing price of $919.69 on August 16, a 3-for-1 stock split would bring its share price down to about $306.56 per share.
3. The real winner of the next Tesla split
The third major point about Tesla’s upcoming split is that it’s a boon for casual investors.
As noted, the stock futures split does not affect the market value of the company. In the case of Tesla, its share price will fall to one-third of its current value, while the number of its outstanding shares will triple. But for retail investors who don’t have access to partial stock purchases through their online broker, dropping the share price from around $920 to just over $306 would be a big deal. It’s a lot easier for investors every day to put together about $300 to buy one share of Tesla than to raise $900 for one share, as of the time of writing.
There is no doubt that retail investors, who have played a large role in driving Tesla’s valuation to nearly $1 trillion, are the biggest winners in the company’s pending stock split.
4. It will not affect Tesla’s competitive advantages
The fourth thing to know about Tesla’s August 25 stock split is that it will have absolutely no impact on the company’s day-to-day operations. This means that it will not affect the competitive advantages that Tesla has achieved in one of the largest corporate valuations in the world.
Aside from the fact that no other car company has built itself from the ground up to mass production for over five decades, Tesla could reach a significant psychological milestone this year. Even as COVID-19 shutdowns hurt production at its giant Shanghai plant, the company appears to be on track to reach 1 million electric vehicles produced and delivered in 2022.
In addition to production advantages, Tesla batteries remain a bright spot in an increasingly crowded industry. Compared to most other electric vehicle offerings, the power, range, and capacity offered by Tesla’s batteries are the best. This is what helped create such a huge demand for the company’s electrical lineup.
There’s also CEO Elon Musk, who has been embraced largely by the retail investor community as a visionary. Musk oversaw the introduction of four electric vehicle models currently sold, and helped diversify his company into energy storage products and the installation of solar panels.
5. It will also not hide the company’s long-term risks
The fifth and final thing to know about the impending Tesla stock split next week is that it also won’t sweep the company’s long-term risks under the rug.
Even though Tesla’s stock price has been on fire for more than a decade, there are a number of red flags that this staggering increase isn’t sustainable. For example, auto stocks are traditionally valued with a single-digit or very low two-digit price-to-earnings ratio for the forward year. For Tesla, investors have to pay a whopping 58 times Wall Street’s projected 2023 earnings. Even with Tesla somewhat diversified, that’s a huge multiplier for a company that makes a mostly commodity product.
Another big concern for Tesla shareholders is Elon Musk. While many may consider him a visionary, he has also become a huge burden. Putting aside the circus accompanying a potential takeover of social media shares TwitterMusk has a terrible habit of not keeping his promises. As I explained earlier, Musk’s promises to put a million automated engines on the road, deliver top-tier fully autonomous driving, and bring the Cybertruck and Tesla Semi into production have been held back by a year or more.
Finally, it appears that Tesla’s competitive advantages are already dwindling. While the company offers a huge advantage in producing electric cars, the stocks of new and old cars are catching up with Tesla when it comes to the battery range. With old automakers spending tens of billions on electric vehicle research and product development, it will likely take more than the euphoria of a short-term stock split to hold shares of such an outstanding valuation.