Wall Street and the investing community have been dealt a difficult hand in 2022. Since the beginning of the year, the benchmark S&P 500 and tech-centric Nasdaq Composite both entered bear market territory, the U.S. inflation rate skyrocketed to a 40-year high of 9.1% in June, and the U.S. economy delivered back-to-back quarters of gross domestic product declines, signaling a "technical recession."
Yet amid this chaos, investors have gravitated to what's arguably the one silver lining this year: stock splits. A stock split allows a publicly traded company the ability to alter its share price and outstanding share count without impacting its market cap or operations.
Image source: Getty Images.
According to data from Fidelity, 212 public companies have announced and/or enacted stock splits since the beginning of the year. This includes one of the largest and most-popular stocks on the entire planet, electric-vehicle (EV) manufacturer Tesla (TSLA -1.11%). With Tesla's stock split rapidly approaching, here are five things investors should know.
1. When the Tesla stock split will take place
Perhaps the most pertinent piece of data for investors to know is when, exactly, Tesla's stock split will take place. The answer is exactly one week from today, on August 25, 2022 prior to the market open.
Keep in mind that it can sometimes take stock quote providers and online brokerages a few hours to a full day to recognize that a stock split has taken place. If you wake up and suddenly find that your investment portfolio has lost significant value overnight, or that Tesla's shares are being quoted down 60% or more on Aug. 25, there's a very good chance you can overlook this as a reporting error that'll quickly be remedied by the provider.
2. The magnitude of the Tesla stock split
The second important tidbit of information Tesla's current and prospective investors should know is the magnitude of the forward stock split.
In June, Tesla proposed enacting a 3-for-1 forward split. Effectively, this would reduce the company's share price to a third of its current value while increasing the company's outstanding share count by a factor of three. At the August 4 shareholder meeting, Tesla's shareholders voted to approve the company's proposed split.
Based on Tesla's closing price of $919.69 on August 16, a 3-for-1 stock split would reduce its share price to around $306.56 a share.
3. The real winner of the upcoming Tesla split
The third key point about Tesla's upcoming split is that it's a boon for everyday investors.
As noted, forward stock splits don't affect a company's market cap. In Tesla's case, its share price will fall to a third of its current value, while its outstanding share count will triple. But for retail investors without access to fractional-share purchases through their online broker, reducing the share price from almost $920 to just over $306 will be a big deal. It's a lot easier for everyday investors to set aside around $300 to buy a single share of Tesla than it would be to gather $900 for one share, as of the time of this writing.
There's no question that retail investors, who've played a big role in pushing Tesla's valuation to nearly $1 trillion, are the biggest winners of the company's pending stock split.
4. It won't affect Tesla's competitive advantages
The fourth thing to know about Tesla's Aug. 25 stock split is that it'll have absolutely no impact on the company's day-to-day operations. That means it won't impact the competitive advantages Tesla has ridden to one of the largest corporate valuations in the world.
Aside from the fact that no other auto company built itself from the ground up to mass production in over five decades, Tesla could reach an important psychological milestone this year. Even with COVID-19 lockdowns hurting production at the Shanghai gigafactory, the company looks to be well on its way to reaching 1 million EVs produced and delivered in 2022.
In addition to production advantages, Tesla's batteries continue to be a bright spot in an increasingly crowded industry. Compared to most other EV offerings, the power, range, and capacity offered by Tesla's batteries are superior. This is what's helped create such incredible demand for the company's EV lineup.
There's also CEO Elon Musk, who the retail investor community has largely come to embrace as a visionary. Musk has overseen the introduction of four currently sold EV models, and has helped diversify his company to include energy storage products and solar panel installation.
A Tesla Model S charging. Image source: Tesla.
5. It also won't hide the company's longer-term risks
The fifth and final thing to know about Tesla's impending stock split next week is that it's also not going to sweep the company's longer-term risks under the rug.
Although Tesla share price has been on fire for more than a decade, there are a number of red flags that suggest this amazing run-up isn't sustainable. For example, auto stocks are traditionally valued at a single-digit or very low double-digit forward-year price-to-earnings ratio. As for Tesla, investors are having to pay an aggressive multiple of 58 times Wall Street's forecast earnings for 2023. Even with Tesla being somewhat diversified, this is a lofty multiple for a company that predominantly makes a commoditized product.
Another big concern for Tesla shareholders is Elon Musk. While he might be considered a visionary by many, he's also become a major liability. Putting aside the circus that's accompanied his prospective takeover of social media stock Twitter, Musk has a terrible habit of failing to deliver on his promises. As I've previously highlighted, Musk's promises to put 1 million robotaxis on the road, deliver higher-level full self-driving, and bring the Cybertruck and Tesla Semi into production, have all been pushed back one or more years.
Lastly, Tesla's competitive advantages already look to be waning. While the company does offer a sizable EV production advantage, both new and legacy auto stocks are catching up to Tesla when it comes to battery range. With legacy automakers spending tens of billions on EV research and product development, it's probably going to take more than short-term stock-split euphoria to hold shares at such a premium valuation.
