Tesla Stock is Splitting: Should You Buy?
Updated: Nov 9, 2022
Discover how the Tesla stock split will affect investors.
Getty Images/Natdanai Pankong/EyeEm
Tesla Stock Split 2022: What Does it Mean?
On August 25th, 2022, Tesla stock will have a 3-for-1 split, meaning investors will own three shares for every one they currently own. However, this doesn’t mean the value of their investment is worth more.
The stock price will drop by 1/3rd as well, which cancels out the extra shares investors receive. When the amount of shares increases but the company’s market cap remains the same, this is known as a stock split.
How will the Tesla stock split work?
All Tesla shareholders will receive a dividend of two shares of stock for every one they own. For example, if an investor owns 100 shares, after the split, they will hold 300.
Tesla’s stock price trades around $900 per share, but after the split, one share will be worth $300, or 1/3rd of the value. Therefore, nothing about the investment has changed except the price for every share, which is nothing to change your investment thesis over.
Why do stocks split?
Stocks split for various reasons, including accessibility for retail investors and driving demand. Even though the company isn’t changing, more investors will be able to afford the stock since it will trade at a lower price.
Additionally, it will build hype around the stock to drive demand. Companies like Tesla have a large following and benefit quite a bit from news like a stock split. Stock splits make investors interested in a stock since it looks “cheaper” than before.
How have other companies reacted to stock splits?
Other tech companies such as Google and Amazon have also had stock splits this year. If we look at their charts, both stocks fell directly after the stock split.
However, these stocks have since rallied and are trading above their pre-split prices.
Now, let’s look at the Tesla chart to see how it is shaping up before its stock split.
As you can see, Tesla has been trending up with the rest of the market lately. If Tesla stock acts like Google and Amazon after its split, it will drop and likely take down the rest of the market.
Is it time to sell Tesla stock?
If you are investing in a company, a stock split shouldn’t be a reason to buy or sell shares of your stock. These decisions are made based on your conviction in the company and its overall performance.
There are many better questions to ask yourself, such as:
Is Tesla's business model reliable and scalable into the future?
Is there going to be increased demand for EVs going forward?
Is Tesla able to compete with other auto manufacturers?
Is Tesla growing its revenue and cash flow each year?
When making investment decisions, these questions are all more important than whether the stock is splitting or not.
You can check Tesla's financial statements to determine if its revenue is increasing yearly. This information will be included in the income statement. As you can see above, Tesla’s revenue is undoubtedly growing each year.
You can also check the cash flow statement to determine Tesla’s operating and free cash flow. Tesla is practically the definition of a successful growth stock.
In 2018, Tesla had negative free cash flow. Since then, Tesla has been producing positive and increasing cash flow every year. That is the goal of every unprofitable growth company.
Benefits of the Tesla stock split for investors
Tesla’s stock split comes with benefits that primarily help out retail investors and traders, such as:
Lower share price
One of the great benefits of a lower share price is the ability to own 100 shares of the stock more affordable. If you own 100 shares, you can use options strategies like covered calls to hedge your position.
Since more people will be trading options on Tesla stock, there will be more liquidity. Liquidity is the ability to easily buy or sell an investment at a reasonable price. Tesla is already quite liquid but will have even more liquidity after the split.
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