Tesla bears will—very likely—finally see shares of the EV giant drop below $300. The problem is it will be the result of a five-for-one stock split. Stock splits aren’t supposed to matter fundamentally, but investors should be ready for more volatility in the aftermath of the move.
Courtesy of TeslaTesla bears will—very likely—finally see Tesla shares drop below $300. The problem is it will be the result of a five-for-one stock split. Stock splits aren’t supposed to matter fundamentally, but investors should be ready for more volatility in the aftermath of the move.
Tesla (ticker: TSLA) shareholders will receive four additional shares for every share held after the close of trading on Aug. 28. Shares begin trading on a post-split basis starting Aug. 31.
Share count will go up fivefold, the price for each share will be reduced by 80%. The total market value of the company—and investors’ portfolios—will be unchanged.
In the past, stock splits were a bullish sign for some aggressive traders, because they might signal confidence in the outlook for the stock. What’s more, a lower share price meant more retail investors can afford the stock. It’s, very simply, easier to afford a $300 stock compared with a $1,500 stock.
But now investors can hold stocks in ETFs and many brokers offer fractional shares. Fidelity, for instance, let investors buy a portion of many stocks for as little as $5.
Even if nothing really changes with a split, investors can expect the stock to fluctuate in coming days. Share are already up 6.3% in after-hours trading.
Apple (AAPL) is the most recent tech giant to announce a split, four for one. Apple stock is up more than 10% since the announcement, but strong earnings likely have more to do with the move than the coming stock split.
Looking ahead, investors—both Tesla bulls and bears—are waiting for a decision by the S&P 500 to include Tesla in the benchmark. Tesla management will also host a battery-technology day in September.
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The bears will hope for bad news on either front. And Tesla stock has a lot of bears. The average analyst price target is below where the stock trades. What’s more, 15 out of 36 analysts covering the company rate shares at Sell. The average Sell-rating ratio for stocks in the Dow Jones Industrial Average is about 7%. And bearish investors have sold about 8% of the stock available for trading short, multiples higher than the measure for the average stock in the Dow, which is less than 2%.
In a short sale, investors borrow shares they don’t own and sell them, betting that the borrowed stock later, buying it back for a lower price.
To this point in 2020, bears haven’t had a good year shorting Tesla stock. Shares are up about 229% year to date, far better than comparable returns of the Dow and S&P 500 as well as conventional-automotive peers.
Tesla’s gains have made it the most valuable car company in the world, surpassing Toyota Motor (TM) earlier in 2020.
The split won’t impact the S&P 500 decision. That is a market-capitalization-weighted index. The absolute share price doesn’t matter. The Dow is a price-weighted index. The size of the company doesn’t matter—only the price of the stock matters when calculation the Dow Index. Maybe Tesla could go in the Dow. That’s a wild guess and would require bumping one of the 30 components out.
Write to Al Root at allen.root@dowjones.com
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August 12, 2020 at 04:47AM
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