This has been a challenging year in every sense of the word for Wall Street professionals and everyday investors. The widely followed S&P 500 and growth-dependent Nasdaq Composite both plunged into bear market territory; the U.S. economy has delivered back-to-back quarters of gross domestic product declines; and the U.S. inflation rate hit its highest level in more than 40 years. The cherry on top is the Federal Reserve is aggressively hiking rates into a steeply correcting market for the first time ever.
Despite this turmoil, investors have a natural tendency to seek out Wall Street's silver lining. In 2022, this shining light is stock splits. Since the beginning of the year, dozens of companies have announced and/or enacted stock splits.
Image source: Getty Images.
A stock split is a way for a publicly traded company to alter its share price and outstanding share count without having an impact on its market cap or operations. With a number of top-tier companies enacting sizable stock splits this year, including Alphabet, Amazon, and Shopify, all eyes now turn to the imminent split for electric-vehicle (EV) manufacturer Tesla (TSLA -1.11%). This'll be Tesla's second stock split as many as years.
For current and prospective Tesla shareholders, here's everything you need to know about the company's upcoming split.
When will the Tesla stock split officially go into effect?
Let's start with the question that shareholders clearly care about the most: "When will Tesla's forward stock split take effect?" The answer is (drum roll) ...tomorrow. On Aug. 25, 2022, prior to the opening bell, Tesla's shares will officially begin trading at their post-split price.
Something for current and prospective investors to keep in mind is that stock quote providers, and even some online brokerages, can take a couple of hours to perhaps even a full day to recognize that a forward stock split has taken place. It's possible you might wake up and see a quote for Tesla down 65% to 70%. It's also possible the value of your portfolio could plummet if your online brokerage hasn't properly adjusted for the coming stock split and Tesla represents a sizable position. Either way, these are nothing more than data errors that should be corrected within 24 hours. Don't panic.
How many extra shares will you own?
The next big question is probably along the lines of, "What does Tesla's stock split mean for my position?" With the company announcing a 3-for-1 forward split, and shareholders approving said split at the company's annual meeting on August 4, it means the number of shares held in your portfolio will increase by a factor of three. Conversely, Tesla's share price will be reduced by a third following its August 24 close.
For example, if you owned 20 shares of Tesla at $890 per share as of this past weekend, your split-adjusted stake would be 60 shares of Tesla held (three times your existing position) at $296.67 per share (a third of the previous price). You'll note that Tesla's market cap doesn't change despite the share price and outstanding share count being adjusted.
As of August 25, a single share of Tesla should be considerably more affordable for everyday investors without access to fractional-share purchases through their online broker.
Does this stock split affect Tesla's business in any way?
You might be wondering what impact Tesla's stock split could have on its day-to-day operations, balance sheet, or operating income statement. The answer is, very simply, none whatsoever.
Think of stock splits as nothing more than window dressing that allows companies to make their shares more accessible for retail investors. It's also a way of encouraging higher average trading volume, which CEOs like Elon Musk understand can keep Tesla at the heart of the conversation on online message boards and within investing communities.
Tesla's share price and the number of shares it ultimately has outstanding have absolutely no impact on the company's ability to produce and sell EVs or innovate. Although stock-split euphoria can, indeed, push the share price of imminent stock-split stocks higher in the short run, it's going to be Tesla's ability to grow its sales and profits, maintain its competitive advantages, and innovate, which'll determine the direction its share price heads over the long-term.
A Tesla Model S charging. Image source: Tesla.
Is there anything else investors should know about stock splits?
Lastly, Tesla's shareholders and prospective investors should understand that stock split-mania is a short-term event. Although investors are hyped up at the moment, a stock split doesn't mask the fact that one of the most widely held stocks on the planet is facing a slew of headwinds.
Like most auto stocks, Tesla is contending with semiconductor chip shortages and generalized parts shortages predominantly caused by the COVID-19 pandemic. In particular, lockdowns in various parts of China have curtailed production at Tesla's Shanghai gigafactory. A stock split isn't going to fix Tesla's supply chain problems.
The company's impending stock split won't change the fact that shares are quite pricey, either. With the vast majority of auto stocks valued at a single-digit forward-year price-to-earnings (P/E) multiple, Tesla stands out like a sore thumb with its forward P/E ratio of 56. Even with Tesla diversifying some of its sales into energy storage and solar panel installation, this is a nosebleed premium bestowed by the investing community.
Perhaps most importantly, a stock split isn't going to mask Tesla's biggest liability: its own CEO. Elon Musk brings a laundry list of legal woes to the table, as well as some questionable decision-making. He also has a long-standing habit of overpromising and underdelivering as CEO. A forward stock split isn't going to change any of this.
