Headlines hit the news on Monday that Tesla is planning to split its stock again. While the electric vehicle company has never paid a cash dividend, if it proceeds with splitting its stock, shareholders will receive additional shares in the form of a stock dividend.
A stock split doesn’t add any value to shares in and of itself, but it does lower the entry point for investors to buy shares, which can be a powerful driver of stock price growth.
As Tesla’s shares have soared over the $1,000 mark since its last stock split, not all of those wanting to buy the stock may be able to stomach such a high bar. Psychologically, many would find it more palatable to buy “cheaper” shares, even if logically, they know that the shares are cheaper because they represent a smaller piece of the company.
The question for investors is, will Tesla’s stock split strategy work to put money in the pockets of investors a second time, or will it serve as a wake-up call and send people running to the exits of this richly valued stock before it drops again?
The last stock split worked wonders
Tesla’s first stock split took place on Aug. 31, 2020. The five-for-one split caused an initial rally before shares declined 33% in the following few days.
That was just a minor setback for the volatile stock, though. Over the next four months, Tesla’s shares more than doubled, passing the $800 mark again by the first week of 2021.
Latest upswing prompts action
Since hitting highs upwards of $1,200 in November 2021, Tesla’s shares have been losing some of their steam, even dropping below $800 again before ticking back up to the $1,000-plus mark following the announcement of conditional approval to open its new Gigafactory in Germany.
While Tesla’s general upward momentum is undeniable, the stock is incredibly volatile with a five-year beta of 2.05.
The company probably wasn’t too keen on splitting the stock when it was in a downswing, but now that another upswing has materialized, it would be ideal to capitalize on it as quickly as possible.
Due to the stock split announcement, Tesla’s shares gained 8.03% on Monday despite the Covid lockdown suspending operations for the day at its Shanghai Gigafactory. The factory shut down for two days earlier this month due to Covid restrictions.
Repeat or bust?
With Tesla’s Germany Gigafactory gearing up to take on European EV market leader Volkswagen (VLKAF, Financial), which currently has a market share of 25% compared to Tesla’s 13%, it looks like Tesla could be set to gain strong momentum following a stock split.
Tesla also has rising oil prices to help market the EV story to investors, and it has taken proactive steps to ensure the strength of its supply chain, with CEO Elon Musk calling for contracts with raw material suppliers well in advance of when said materials would be needed as part of the company’s hyper-growth efforts.
If Tesla’s growth remains on track, it could very well benefit from breaking up its shares into smaller pieces. As long as the company does not experience a reduction in demand due to inflation, its momentum could survive the increasing interest rate environment due to the strong demand for EVs.
The main risk comes from the possibility that Europe could enter a recession due to the Russia-Ukraine conflict. Food prices are expected to rise quickly and steeply as a result of the conflict, putting significant cost-of-living pressure on consumers. U.S. economic growth will also likely be affected, though to a lesser extent.
As we saw with the short-lived but steep Covid recession in early 2020, a dip into recession territory could trigger a broad market sell-off, punishing investors who bought high. The high growth and high volatility nature of Tesla’s stock would exacerbate any major declines.
