Tesla (TSLA -3.24%) started the process of another stock split this week. The declaration sent shock waves through the stock market, and Tesla's shares rose 8% that day.
However, that split-based price jump should be short-lived. Investors are getting overly excited about a purely mathematical accounting trick. Nothing has changed for Tesla's long-term business prospects, and the artificial price jump should fade out in a few days.
This split isn't anything special
Stock splits are pretty common. In fact, most companies go through this exercise at some point in order to keep their share prices at a manageable level. This isn't even Tesla's first rodeo.
Let me show you what I mean. The S&P 500 (^GSPC -0.01%) market index lists 504 stock tickers for 500 different companies. (The handful of extra tickers comes from a few businesses listing more than one class of shares.) These are mostly household names and titans of their respective industries.
Data from S&P Global Market Intelligence shows that 82 of these 504 stocks have executed at least one stock split in the last 10 years. Go back 20 years, and the list of splits on the S&P 500 grows to 219 names. And from a 30-year perspective, we're looking at 370 stock splits.
In other words, roughly 10% of the current S&P 500 members split their stocks in the last decade. That portion rises to 73% in a 30-year review.
This pizza will be just as tasty whether you cut it in 6, 12, or 20 pieces. Image source: Getty Images.
Tesla's stock-splitting experience
Tesla hasn't actually announced a stock split yet. The company is just asking shareholders to approve the issuance of new shares in order to support an upcoming split. We don't even know when the company plans to perform this move, or the ratio of the split. More information will come up as the company publishes its official proxy materials for the annual meeting, followed by a shareholder vote and only then a formal announcement of a stock split.
Again, none of this makes much of a difference to your current or planned Tesla holdings. Tesla will simply cut the same ownership pie into lots and lots of smaller slices. The grand total will remain the same, and each one of your current Tesla shares will turn into something like five or 10 stubs instead -- but with the same overall market value. The whole point of this exercise is to bring down share prices from their lofty perk at nearly $1,100.
The company's first and so far only split took place in the summer of 2020. Share prices surged in the weeks between the announcement and the final five-for-one split at the end of August. Then, investors noticed that the split hadn't changed anything, and some of Tesla's inflated market value leaked back out.
Here's what really matters
Now, Tesla was crushing the market before the 2020 split and then got right back to stellar returns after that little chart squiggle. The market is often a popularity contest in the short run but an effective weighing machine in the long run. That's why the stock has gained more than 1,800% in the last five years.
The stock split two years ago was just a small footnote in the grand scheme of things. See if you can even detect it in this five-year chart:
As a Tesla investor, I care about the company's vehicle deliveries, revenue growth, and free cash flows. The details of how many shares I can buy for $1,100 are less interesting, especially now that most stock brokers will let us buy a fraction of a share in high-priced tickers like Tesla. It's all about the Benjamins on the company's financial statements, after all. Tesla is a fantastic buy today from that perspective, with or without the upcoming stock split.
