On August 11th of 2020, Tesla made the official announcement of its stock split. Ever since its shares have gone up by 81% and had a 5% increase compared to the S&P 500. It is not uncommon for giants like Tesla to split their stocks as the goal is to make the stock price affordable for retail level investors with smaller investing capabilities.
According to some stock market analysts, people give more weight to technology stocks that are associated with renewable energy, software, and transportation. So, a split of this nature suggests that the market is very much influenced by individual buyers of stocks.
There were also those who were not very optimistic about this split as the price was not expected to rise post-split in theory. The News Engine takes a look at the reactions to split implementation that occurred on August 31st. As the price goes up, the Tesla stock split once again turns heads.
Let us first put the stock split into context to understand what this indicates and what it does not. In order to do this, we will also consider behavioural finance theories.
The traditional theory on stock splits argues that any time a company splits its stock, there are no serious financial impacts. Splits are purely cosmetic changes and have no actual effects on the trading of the company stocks. But behaviour research tells us otherwise.
Behavioural finance proposes that stock splits have a much better chance of avoiding reduction in future earnings for companies than those who have price-to-book ratios and market capitalisation that are comparable.
Putting it simply, behavioural studies indicate that for the reference class of Tesla, a stock split is a sign of positivety as it shows that the company is confident about delivering the future earnings that will not decline.
What happened Recently?
Well, Tesla stock officially got split on August 31. If you had one share of Tesla on the weekend, you have five of them today. At the time this article was written, Tesla stock had already gone up by over 8%. Who knows how it will end up by the time you are reading this article.
We are suggesting that it will further increase or go down but right now it seems like there is a lot of excitement around the stock. Obviously, the retail investors who have not had enough money to buy Tesla stock in the $1000 or $2000 are now entering the stock at a much more affordable $400 range. Considering the company growth and accounting for economic factors, this will look ridiculously cheap in 2030 so people have all the reasons to invest now.
This is a very important event in the stock market. So naturally, it has caused a great deal of coverage on the mainstream finance media networks. When you look at what is happening with Tesla, there are three catalysts to look forward to now.
These are the Battery Day coming up on September 22, quarter three deliveries coming in the first week of October, and quarter three report that will come out in late October or November. There is absolutely no question that ‘Battery Day’ could be a hugely positive catalyst for Tesla’s stock price.
But if history is anything to go by, the mainstream finance media, wall street analysts, and plenty of retail investors will end up scratching their heads not knowing what happened there. Consider the Cyber truck unveil in November 2019 or Tesla’s Autonomy Day reaction when the stock went down after these events.
All because people found it hard to grasp what was presented to them. Such could be the case for the ‘Battery Day’ even if Tesla has great news for us. Another positive catalyst that we did not mention earlier is the inclusion of the S&P 500.
All in all, this was a smart move by the company and ultimately there will be more conglomerates who will follow in their footsteps. Tesla is in a position of strength as the EV side for Tesla has gone into a super cycle along with Apple. Does this probably mean that we have hit the peak of the pandemic economy? or investors will be keen on putting more money into these big companies?
The fundamentals continue to be there in the tech stocks and even though the stock split is going to be the headline, it speaks to a broader issue here that the stronger is getting stronger.