What Investors Should Know about Tesla’s Proposed 3-for-1 Stock Split

In March, Tesla (NASDAQ: TSLA) revealed its intentions to pursue a stock split, and now we have more details. This month, the electric vehicle giant filed paperwork with the Securities and Exchange Commission (SEC) to move forward with a 3-for-1 stock split. However, nothing is set in stone until shareholders give the company the green light at its annual shareholders meeting in August.

A company’s path to a stock split can be a bit confusing. Here’s what you as a retail investor need to know about Tesla’s plan.

Image source: Getty Images.

Behind the scenes of Tesla’s stock split timeline

Tesla isn’t a stock split rookie. In August 2020, Tesla’s performed its first split, and it was a hit. Following its announcement that it intended to undergo a 5-for-1 stock split, the share price soared above $2,000, paving the way for it to join the trillion-dollar club.

Now, Tesla is putting its name in the bag for another round. But with U.S. inflation at its highest level in more than four decades and interest rate hikes creating a mountain of uncertainty, there’s no telling how Tesla’s stock will behave after this stock split.

Here are a few dates to keep in mind:

March 28, 2022: Tesla submitted Form 8-K to the SEC that announced its stock split intentions.
June 6, 2022: All shareholders as of close of business on this date were invited to attend the annual shareholders meeting virtually.
June 10, 2022: Tesla filed paperwork with the SEC, which revealed plans to pursue a 3-for-1 stock split.
Aug. 4, 2022: Shareholders will vote on the 3-for-1 stock split at the 2022 Annual Meeting of Shareholders.

Busting the myths of stock splits

A stock split may sound like a big deal. But when you pull back the curtains, you’ll discover that it’s only a cosmetic change. It doesn’t make the stock more valuable or your account balance fatter. You’ll just wake up with more shares than you originally had, with face values that are proportionally lower.

Let’s break it down. Prior to Tesla’s 5-for-1 stock split in August 2020, each share was valued at around $2,250. The split dropped the share price to about $450. Instead of having one share of Tesla valued at $2,250, you had five shares of Tesla valued at $450 per share. The overall value of your total shares remained the same.

So, let’s suppose that Tesla shares are trading at around $720 per share — a value they touched Wednesday morning — at the time of the next split. After the big day, investors will have three shares in their account for every one they owned the day before, and they will be valued at around $240 each.

Should you care about stock splits?

A number of well-known companies have hopped on the stock-splitting bandwagon this year. The calendar continues to grow, but here are just a few that have received attention:

Amazon: June 3 (completed)
Spotify: June 28
Alphabet: July 15 (proposed)

But before you jump to any conclusions about the value of a stock split, here are a few questions you should ask:

What is the company’s long-term growth potential?
Does the company have competitive advantages?
Are there any supply chain challenges, market conditions, or trends that could limit its growth?
How is the business currently performing? Look at free cash flow, revenue, and other numbers.

Is Tesla’s stock split good or bad for investors?

The most obvious value of a stock split is that it leaves a company’s shares trading at a more affordable price. In the current era, when the option to buy fractional shares is widely available to retail investors, that’s less of a big deal. But people may feel better about having the ability to buy whole shares of a company’s stock, and splits open up that opportunity to more investors.

Although many investors are enthusiastic about stock splits, they are not a key indicator in gauging how a company will perform. Keep your eyes on the fundamentals, invest in high-quality businesses, and stock splits will just be icing on the cake.

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