Tesla’s been the talk of markets this year, mainly because of Elon’s jokes about buying social media companies and soccer teams.
Next week, it could grab headlines again for a more legitimate reason: a 3-for-1 stock split that could make Tesla’s shares 66% cheaper.
Sound like a deal? It’s actually one of the oldest moves in the book to get investor attention with minimal effort. While stock splits theoretically don’t change market value, they often stir up enough interest for a small price bump.
Today, it’s one of Wall Street’s most powerful ways of catering to the everyday investor.
Splitting it up
A stock split is exactly what it sounds like: A company decides to take its amount of available shares and multiply them by two (or three, or four, etc.), while dividing the share price by the same amount. In the end, the value of stock you hold doesn’t change — just the number of shares and the price they trade at. It’s like cutting a pizza in more slices, so you can share it with more friends.
Companies opt to split their stock for several different reasons. Lower share prices make the stock more accessible to everyone — a compelling reason, when the average share price of an S&P 500 company is $176. Stock splits can also improve the tradability of shares — more entrants, more volume — and help companies better allocate stock compensation. At the very least, they tend to give off good vibes. After all, stock prices that are high enough to split get there because people are buying in.
In the past, stock splits have been an effective way to open the floodgates to a new base of investors. Since 1990, 61% of S&P 500 companies who have split their stock performed better than the S&P 500 in the period between announcing a stock split and implementing it.
But stock splits have become less popular over the years. Why? Because there are other ways to invest in a company besides buying the stock itself— think ETFs and fractional shares.
Splits as a status symbol
Lately, though, stock splits have re-emerged as a status symbol of sorts in popular names. Over the past two years, three of the five MAMAA stocks — Meta, Apple and Alphabet — have split their stocks. Tesla is going on its second stock split in two years. Gamestop, the video game retailer left for dead before it became a meme stock, split its shares into four last month. At the same time, retail interest in the stock and crypto markets has exploded, giving companies more reason to appeal to the everyday investor.
For the most part, investors have played along. Apple gained 34% in August 2020, after announcing a 4-for-1 split. Around that same time, Tesla shares rallied 80% in three weeks, after publicizing its own split. Stock splits became the talk of social media, and the frenzy often turned into opportunity for shareholders.
The bear market has complicated things, though. In general, people seem to be more focused on a company’s cashflows rather than its stock price momentum. Stock splits didn’t help keep Amazon or Google afloat during the tech selloff this year, and they’re two of the most well-known companies on the market.
Still, a lousy year hasn’t chased retail investors out of the market. Over 90% of everyday investors held onto their stock positions this year, based on a survey of 1,000 investors we conducted in June. The social media-fueled pop may be more elusive, but there’s still a good argument for making your stock accessible to the masses.
And let’s be honest — while fractional shares are a cool innovation, they don’t offer the same benefits as whole share ownership. Everyday investors care deeply about where they invest their money, and they want community and belonging along with ownership. There’s also a psychological benefit to owning a whole unit of something versus a part of it. Look up unit bias: It’s the reason why you want to eat a whole cheeseburger, even if you’re full.
Tesla’s smart split
Back to Tesla. Tesla’s stock has trailed the S&P 500 since the split was announced on August 5. It’s a far cry from the fervor we saw around the 2020 split for various reasons. But despite all of Tesla’s (and Elon Musk’s) bad press this year, the stock split may be a smart move to broaden out the investor base. In this renaissance era for retail investors, it’s tough to ignore the access, marketing, and cheap financing that a stock split can provide — even if the split itself doesn’t change the company’s value.
And if you’re a Tesla shareholder, don’t be surprised if you wake up Thursday morning to see you own three times as many shares for a third of the price.
*Data sourced through Bloomberg. Can be made available upon request.