Tesla did its first stock split in 2020. Then investors received four additional securities. Little is known about the new crushing. We tell you why it is needed and whether Tesla shares will grow after the split.
Tesla has announced plans to conduct a stock split, according to a filing with the US Securities and Exchange Commission (SEC). This proposal was approved by the Board of Directors. The decision must, however, be approved by the shareholders at the annual meeting.
It is unknown when the split will occur or in what ratio it will occur. The most recent annual meeting took place on October 7, 2021. Analysts at the investment firm Freedom Finance also noted that Tesla’s shareholders typically meet in the fall.
A split is the division of a single stock into several. As a result, the value of one security falls while the number of shares rises.
This stock split could be the company’s second since going public at the end of June 2010. On August 31, 2020, Tesla held its first split at a 5:1 ratio, which means five new shares for one old one, and each shareholder of the electric car manufacturer received an additional four shares.
From the end of August 2020 to March 25, 2022, the company’s shares increased by 102.8 percent, and by 128 percent if we count the opening on August 31, the previous year. By the end of trading on March 25, the paper had lost 11.7 percent since the beginning of the year.
Nonetheless, Tesla shares rose 5.34 percent to $1,064.59 per share in premarket trading on March 28, according to NASDAQ trading data. The price of one share reached $1,093.35 as growth accelerated to 8.18 percent. Following that, it slowed slightly, with the shares falling to $1,078.27 (+6.69%).
Why does Tesla need a new split?
According to the document, the company intends to conduct a stock split in order to pay dividends. However, Tesla intends to pay with shares rather than cash.
If the company splits, the number of shares in investor portfolios will grow; the new securities received by shareholders will be dividends. Although the proposal was approved by the board of directors, the payment of dividends in shares requires final approval by the board.
According to Fortune, speculation about a possible Tesla stock split increased after the price of one share surpassed $1,000. For several months, Gary Black, managing partner of The Future Fund, has advocated for a stock split. According to him, this will increase demand for Tesla stock. Following the split, it will be easier for investors with limited capital to purchase shares in the electric vehicle manufacturer.
According to Ksenia Lapshina, an analyst at Finam Financial Group, Tesla seeks to maintain its attractiveness for retail investors by remaining a “people’s” stock and a favorite of investors not only in the United States, but also in other parts of the world. “This explains the company’s desire to conduct another split,” she explained.
According to The Mothley Fool, a consulting firm, the Tesla stock split will not necessarily open up shares for low-capital retail investors because many brokers offer fractional stocks. However, The Mothley Fool previously stated that Tesla could become a “excellent candidate for inclusion in the Dow Jones index” following the stock split. The company is now included in the calculation base for the S&P 500, NASDAQ 100, and several other indices.
What will happen to the shares after the split?
The split, according to David Trainer, CEO of investment research firm New Constructs, could “further inflate the Tesla stock bubble that has been brewing for the past two years.”
According to Roth Capital analyst Craig Irwin, companies typically do stock splits when “good news is on the way.”
Tesla opened the first European electric car factory in Grünheide, near Berlin, on March 22. It has the capacity to produce up to 500,000 electric vehicles per year. However, according to Tesla CEO Elon Musk, reaching peak production capacity could take more than two years.
Wedbush Securities analyst Daniel Ives wrote in a report, “We view Tesla’s decision to follow the example of Amazon, Google, and Apple and initiate a second share split in two years as a prudent strategic move that will be a positive catalyst for the stock going forward.”
“Because of the lower price range for ordinary private investors, the planned split could increase liquidity shares and generate additional interest in the company’s shares,” analysts at Freedom Finance believe.
According to Lapshina, the split cannot be considered a full-fledged share growth driver, and it is important to consider the company’s financial position as well as the industry situation. She stated that supply chain issues and a shortage of semiconductors are impeding the growth of both the industry as a whole and individual companies in the electric vehicle industry.
This situation, according to the analyst, could last until the end of 2022. Tesla has already stated that it will not be releasing any new car models this year. Furthermore, the US Federal Reserve’s (FRS) rate hike cycle is putting pressure on the value of Tesla shares, which are among the growth companies, and such securities are volatile, according to Lapshina.
It is unknown when the split will take place. The market situation can change dramatically during this time, so discussing the prospects for the growth of Tesla shares after the split is still impossible, according to the analyst.
“Tesla shares are trading at a 15-20% premium to their theoretical fair value.” The press is picking up steam. “Shares may reach $1160–1200 in the medium term, but the risks are high,” said Oksana Kholodenko, Head of Analytics and Promotion at BCS Mir Investments. According to her, Tesla shares are up twice as much as the S&P 500, but also down twice as much.
According to Refinitiv’s forecast, the company’s revenue growth could exceed 60% in the coming year, according to Kholodenko. According to the expert, Tesla expects EV deliveries to reach at least 1.4 million in 2022, representing a more than 50% year-on-year increase.