Written by / Zhang Ou
Edited / Meng for
Design / Shi Yuchao
Source/TIME/Bloomberg by Erin Gobler, Subrat Patnaik, Esha Dey and Jeran Wittenstein
Source: Natdanai Pankong (Getty Images)
Yogi Berra, a legend of the New York Yankees, once said, "Cut my pizza into 4 pieces, I'm not hungry enough to eat 6 pieces." ”
However, no matter how many pieces you cut the pizza into, its size doesn't change.
This is basically the meaning of stock splitting. It allows companies to break down existing shares per share into multiple new shares without affecting their market capitalization, and the percentage of each investor's ownership in the company does not change.
In general, a company's decision to split its shares bodes well for current and future shareholders.
On March 28, Tesla filed a paper with the U.S. Securities and Exchange Commission to request shareholder approval to pass the stock split at the upcoming 2022 shareholder meeting. After the news, the company's stock price soared 8.1%, and its market value increased by about $84 billion to $1.14 trillion.
(Source: Shutterstock)
Stock splitting is a corporate action that aims to increase the number of shares outstanding and reduce the value of each share. Because, as the company's stock price rises, investors can get higher returns, but when the stock reaches a price that makes it difficult for new investors to jump in, it often needs to solve the problem by splitting shares.
When a company splits its shares, it usually uses a specific ratio to indicate how many new shares will be split into each outstanding share. Investors will receive the same number of shares as their current stake in the company.
For example, if it's a 2-1 split, the stock is $10 and you go from one share of $10 to two shares of $5 per share. There is no change in economic value.
Emotional effects in the short term
It took Tesla 11 years to reach a $1 trillion market cap, and only Facebook has achieved this milestone in a much shorter period of time (9 years).
This feat is all the more admirable given how long it took other U.S. trillion-dollar companies to reach that goal.
It took Google's parent company Alphabet 21 years to reach this market cap, Amazon 24 years, and Apple and Microsoft 42 and 44 years, respectively.
According to data from international financial services firm Morgan Stanley, customers of fidelity International, a world-renowned investment management company, announced the stock split from Tesla on March 28 to the morning of March 29, and the most purchased stock was Tesla.
Morgan Stanley analyst Adam Jonas wrote in a note to customers: "The stock split allowed Tesla to add 1.3 General Motors or half a Volkswagen value almost instantaneously. ”
Gina Martin Adams, Bloomberg's chief equity strategist, believes that this is just an emotional effect, and people see the good news of being able to buy hot stocks at low prices and get overexcited at the moment. "Many retail investors feel the price is right and buy it," she said. That's all. ”
Often, stock splits don't really change anything other than making company stocks more readily available. After a short-term adrenaline rush, eventually everything will calm down.
On March 31, Tesla shares closed at $1,096, slightly below the 52-week high of $1,243.49 at $1,243.49 on November 4, 2021
In fact, Tesla's stock has been strong even before the split.
As a leading company in electric vehicles, Tesla generated $5.5 billion in net revenue in 2021 and sold nearly 1 million electric vehicles.
It is the eighth-largest U.S. stock to be purchased per day since 2021, behind Apple, chipmakers AMD and Nvidia, and several other companies.
Tesla and Apple brought back the stock split boom
You know, the last time tech companies had a small upsurge in stock splits was in 2020.
According to Bloomberg data, during the bull market of the late 1990s, the number of corporate stock splits in the S&P 500 reached as high as 100 times a year, but fell to single digits since 2016 and only 2 times in 2019.
Until 2020, Tesla and Apple brought the stock split back to the public eye.
In August 2020, Tesla announced a 5-1 stock split, which brought the stock price back from $2213 to $444, and after the split took effect on August 31, its stock price rose nearly 13% to about $498 per share.
Apple announced a 4-1 stock split in July 2020, dropping $499.23 per share to $124.81. The stock rose 35 percent after the news was announced, and by the time the split was actually completed in September, weekly retail purchases had surged to nearly $1 billion from about $150 million before the July news.
Heading into 2022, tech stocks are moving from hard-to-get-to-behemoths to becoming more grounded – at least on the surface. Tesla is not the only hot stock that announced the stock split.
On Feb. 2, Google parent Alphabet announced a 20-1 stock split, which rose 7.5 percent in the following trading day; Amazon announced on March 9 that a 20-1 stock split would take effect on June 6, in addition to a $10 billion share buyback program. As of March 31, its stock price has risen by about 20%.
If approved, Alphabet's stock price would fall from about $2800 to $140, while Amazon would fall from about $3300 to $165.
On March 31, video game retailer GameStop also joined the stock split, announcing plans to increase the total number of shares from 300 million to 1 billion shares, and its stock price rose by more than 15% immediately after the news was released.
More companies are expected to join.
Stock splits are often considered a sign of a company's thriving. Its share price is rising, which is a good thing, but it also means that the stock has become less affordable for investors. Therefore, the company divides the stock, making the stock more price-competitive and attractive to individual investors.
Data from financial analyst firm Vanda Research shows that retail interest does increase significantly after the news of the stock split.
Tesla has 39 percent of retail investors, and while still dwarfed by GameStop (56 percent) and AMC Entertainment (65 percent), it's much higher than Facebook's parent companies Meta (20 percent), Alphabet (20 percent) and Amazon (26 percent), while being on par with Apple (40 percent).
The number of stock splits completed each year in the S&P 500 constituents▼
(Source: Bloomberg)
While this move could increase the liquidity of stocks and make investors more willing to buy, not all companies will do so. Some companies prefer to keep their stock prices high and take the "aristocratic wind".
One of the most famous examples of eliminating stock splitting must be mentioned here.
Buffett's Berkshire Hathaway Company has never split its Class A stock. In March, its stock price broke through the $500,000 mark in history. As of the close of trading on March 31, trading prices reached a staggering $528921. The market capitalization is $779.14 billion.
This article was originally produced by Automotive Business Review
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