Stock splits are a funny old game. They add no value to a company, yet can tell a lot about the confidence of the board.
Investing in Tesla (NASDAQ: TSLA) is a funny game too, just not that old. For those who have contributed to the $8.3 billion lost by Tesla short-sellers so far in 2020, it’s actually not that funny either. Since the electric car manufacturer’s recent surge, which saw Tesla stock close to hitting the $1,000 mark, many investors are asking the question: will Tesla perform a stock split?
For a refresher course, check out What is a Stock Split?
Why would Tesla perform a stock split?
When companies grow at the pace that Tesla has, their share price becomes too expensive for the average retail investor. Stock splits make a company’s share price more attainable for the man on the street. Netflix (NASDAQ: NFLX) famously performed a 7-for-1 stock split in 2015 as it soared to over $700 per share. In performing a stock split, a company wants to expand the pool of possible investors that may buy its stock. A new investor analyzing the electric vehicle industry, may look at Tesla’s competitors and see 200 shares of NIO (NYSE: NIO) as a better option than one Tesla share. As we know, share price is not intrinsically linked to the valuation of that company. It is a common mistake of investors to look at a low stock price and think ‘cheap’, when this figure is entirely dependent on the number of outstanding shares the company has. For example, Ford’s (NYSE:F) is currently trading at roughly $8 a share and has a market cap of $32 billion, while the Trade Desk (NASDAQ:TTD) trades at around $290 a share yet has a market cap of $13 billion.
While opting for a company based on share price alone will most likely not be a wise choice, there is a fear that a high share price could exclude those investing with little money, especially when not all brokers offer fractional share investing just yet.
Is Tesla going to split?
The chances are slim. There is a prevailing sentiment across Wall Street to avoid stock splits as companies grow larger. The two newest additions to the trillion-dollar club, Google (NASDAQ: GOOG)(NASDAQ: GOOGL) and Amazon (NASDAQ: AMZN) boast share prices of roughly $1,500 and $2,000 respectively, with the granddaddy of them all, Berkshire Hathaway (NYSE: BRK:A)(NYSE: BRK:B) coming in at well over $300,000 per class-A share. These high share prices discourage short-term trading of the stock and promote a more long-term buy and hold strategy, which is the reason why Warren Buffett has stated he will never split Berkshire class-A shares.
A high share price also lends a perception of prestige to a business, and as the man in a tinfoil hat who shouts free life advice outside our office always says: perception is reality. He also says that currency is a social construct and time is a flat circle, so best opt for the Oracle of Omaha’s reasoning over the Oracle of Dublin City on this one.
However, there may be one reason which makes Tesla more likely to perform a stock split than these companies: Elon Musk’s outlandish compensation package. Musk does not receive a salary from Tesla, instead, he is awarded in stock of the company based on ambitious targets, revolving around the company’s market cap, revenue, and adjusted EBITDA. If he were to achieve each target, which would culminate in bringing Tesla’s market cap to $650 billion, the compensation bestowed to him could make him the richest man in the world. Would this lofty moniker be of interest to a megalomaniac like Musk?
In theory, a stock split could be a cause of a short-term bump in Tesla’s share price, but it remains a very unlikely situation. If Musk is to become the richest man on the planet, his focus will be centered more on production and delivery targets than a stock split.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold positions in companies mentioned above. Read our full disclosure policy here.
Financial Analyst at MyWallSt
Michael's first and favorite stock is Square, which he sees becoming a massive player in the payments industry and a leader in the war on cash.