Small investors love Tesla Inc. TSLA-Q, and the electric car maker loves them back.
When Tesla announced on Monday that it will request shareholder approval for a stock split – effectively increasing the number of shares outstanding and decreasing the price at which each share trades – the stock soared as delighted retail investors piled in.
“There is a heavy retail component to Tesla’s investor base,” Dan Ives, New York-based managing director of equity research at Wedbush Securities, said in an interview.
“Many that played Apple, Amazon, Facebook and Microsoft view Tesla as the next pioneer when it comes to disruptive technology. And they’re betting on Elon Musk, who many deem as a modern Albert Einstein,” Mr. Ives added.
There is no fundamental change in the value of a stock when a company finalizes a stock split: A billion shares trading at US$1,000 each is equal to two billion shares trading at US$500 each, in the case of a two-for-one split.
Yet investors cheered: Tesla’s share price rallied 8 per cent on Monday, adding more than US$80-billion to its market capitalization – or more than the entire value of General Motors Co. The shares gained another 0.7 per cent gain on Tuesday.
Tesla was the most-traded stock at the Fidelity brokerage on Monday, according to Reuters. According to the TD Direct Investing Index, which provides a monthly snapshot of Canadian investor sentiment, Tesla was the second-most popular stock among active investors in February (second to the hometown favourite, Ottawa-based Shopify Inc.) – adding to its reputation as a hot trade.
To be sure, there may be sound fundamental reasons why Tesla’s share price is moving higher.
Tesla began making deliveries from its Berlin factory on March 22, ending delays and regulatory challenges, which is good news. And surging oil prices over the past month have underscored the urgency for electric vehicles.
There could be a valuation argument at work here, too. Tesla’s share price declined 37 per cent from November through mid-March, as the prospect of rising interest rates weighed on growth stocks.
While still not cheap based on earnings, the stock looked more attractive to some analysts even as the company faced a semiconductor shortage and inflationary headwinds.
“Amid rising oil prices, EV uptake is an increased priority. And with Tesla the global leader in EV, its long-term case is amplified,” Dan Levy and Trevor Young, analysts at Credit Suisse, said in a research note on Tuesday.
But the impact of the stock split announcement, Tesla’s second in less than two years, is hard to ignore because it follows a couple of similar announcements from tech companies this year.
Both Google parent Alphabet Inc. and Amazon.com Inc. have announced 20-for-1 splits (Feb. 1 and March 9, respectively), turning attention to a practice that had been in decline.
According to Birinyi Associates, the number of stock splits within the S&P 500 dwindled from a recent high of 93 in 1997 to an average of just five a year over the past three years.
Companies saw little need to lower their stock prices, given that it is now easy for retail investors to buy small quantities of shares – even a single one. And well-heeled institutional investors never cared about a stock’s nominal price.
So why are stock splits gaining attention?
It could be owing to perceived performance. Bank of America strategists in February crunched numbers going back to 1980, and found that companies that announced stock splits saw their share prices rise by an average of 25 per cent over the next 12 months. The performance easily beat the 9 per cent average annual gain for the broader market.
They think the reason is momentum: Companies that split their stocks have seen their share prices gain prior to the split and management believes the good times will continue, attracting more investor interest.
The Bank of America strategists suspect that any stock priced above US$500, including BlackRock Inc., Broadcom Inc. and Costco Wholesale Corp., could be part of an upcoming wave of stock splits if companies hop on the emerging trend.
Still, Adam Jonas, an analyst at Morgan Stanley, is scratching his head over the reaction to Tesla’s announcement on Monday.
“We simply cannot fundamentally explain how a stock split can add nearly 1.5 times the market cap of GM or 1 full Volkswagen’s worth of market cap to Tesla almost instantly,” Mr. Jonas said in a note.
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