Tesla’s 3:1 Stock Split Wins Shareholder Approval—Here’s What It Means For Investors

Warmth

Shares of electric vehicle maker Tesla rallied in after-hours trading Thursday as the company won shareholder approval for a 3:1 stock split, the second such move in around two years, as the world’s most valuable automaker looks to make its stock more affordable.

Key Facts

In a widely expected move, Tesla shareholders approved the company’s proposed 3:1 stock split, causing shares of the company to continue rallying in after-hours trading following a 0.4% gain earlier in the session.

Tesla first announced the proposed 3:1 stock split in June as a way to make the $925 stock more affordable; based on today’s closing price the new share price would be around $308.

Although the stock is down roughly 20% this year amid the wider market selloff, billionaire Elon Musk’s electric vehicle maker has still seen its shares surge more than 200% since the last stock split in August 2020.

Stock splits don’t impact a company’s market value, but evidence suggests that by making shares more affordable to retail investors, the move often provides a short-term boost to the share price.

Tesla shares are up over 30% since announcing the 3:1 split in early June, while news of Tesla’s 5:1 stock split roughly two years sent shares over 70% higher in the 20 days following the announcement.

Several other major tech companies have announced stock splits this year and saw subsequent spikes in their share price; Google-parent Alphabet’s split 20:1 in February and Amazon’s stock split 20:1 split one month later.

Crucial Quote:

“When stocks trade in a so-called comfortable range, everyday investors can more easily afford a piece of the company,” according to Lindsey Bell, Ally’s chief money & markets strategist. “That drives more interest in the shares and more interest means more people trading the stock.”

Key Background:

Tesla reported mixed second quarter earnings last month which largely beat analyst expectations. Production took a hit, however, worrying analysts as the company was impacted by ongoing supply chain disruptions as well as a factory closure in China that was due to Covid-related government lockdowns. Tesla’s quarterly revenue of $16.9 billion rose 42% from a year ago, although it fell from a record high of $18.7 billion in the previous quarter, ending the company’s streak of record profits. “In a nutshell, the quarter was better than feared with healthy guidance” for the rest of the year, which certainly “look[s] achievable with no margin for error,” Wedbush analyst Dan Ives said following the earnings report.

Chief Critic:

Tesla shares are overpriced and could plunge more than 50%, according to Citi analysts, who maintain a “sell” rating on the stock with a $424 price target. “The current valuation remains challenging,” especially when considering that the few other companies that achieved a similar market cap did so by generating on average around $100 billion in annualized gross profit versus Tesla’s annualized profit of $20 billion in the first half of the year, the firm points out.

Big Number: $279.3 Billion

That’s how much Tesla CEO Elon Musk is worth, according to Forbes‘ estimates. He is the world’s richest person.

Further Reading:

Tesla Shares Rally Despite Slowdown In Profits, Impact From China Shutdown (Forbes)

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