Stock-Split Watch: Is Tesla Next?

Electric vehicle, energy, and technology company Tesla (TSLA 0.90%) is unique. It made electric cars cool. An eccentric CEO, Elon Musk, leads it. The company has sold clothing apparel with a double meaning, aimed at poking fun at those who doubted it.

But the company’s relationship with shareholders might stand out most of all. It maintains a large shareholder base of individual investors and has already split its stock for them twice.

A new bull market has begun, which could bode well for the share price. Should you be on the lookout for Tesla’s next stock split?

Why do companies split their stock?

Companies split their stock for a couple of reasons. A stock split is when a company divides its stock into a higher number of smaller shares. It’s like cutting a pie into smaller slices so more people can have some.

Suppose you own 10 shares of a stock trading at $100 ($1,000 in total). The company splits its stock 4-to-1, dividing each share into four. Your 10 shares would become 40 shares, trading at $25 each. You still have $1,000 worth of stock, but more shares at a lower price per share.

This point is crucial: A stock split impacts the share price because each share represents a smaller portion of the company. Fundamentally, the value of the stock itself doesn’t change. The pie never gets bigger just because you cut it into more pieces.

So, why do companies do it? First, it makes it easier for individual investors to accumulate shares. It also creates some buzz around a company, which may be good for the share price in the short term.

Tesla’s stock-split history

Tesla has split its stock twice. The first time was a 5-to-1 split in 2020, and the second was a 3-to-1 split in 2022:

TSLA Chart

TSLA data by YCharts

The company has noted two reasons for stock splits. First, it awards stock to employees as compensation, and splitting it into smaller shares helps them manage their stake in the company. Second, Tesla knows that individual investors heavily support it and the company wants to ensure the stock remains accessible to them. According to Wall Street Zen, non-insider individuals own roughly 44% of the company’s outstanding shares.

Will Tesla split its stock? Here’s what matters

Today, Tesla stock is trading at just over $180 per share, far from its 52-week high of $299. Tesla didn’t split at roughly $300, so it’s hard to see a split coming without the stock at least hitting a new high.

Investors should focus more on the company’s recent fourth-quarter earnings report, which gave shareholders a glimpse into the short- and medium-term future. Management stated that vehicle deliveries will likely decline in 2024 because Tesla is focusing resources on readying a next-generation vehicle design that it believes could spark its next major growth phase.

The market often doesn’t look very far ahead, so this anticipated production decline could keep shares from new highs despite the broader market recently enjoying its own all-time highs.

What ultimately matters is whether investors believe Tesla will continue to grow and create value for its shareholders over time. Its next-generation platform aside, there’s certainly no shortage of growth opportunities in electric vehicles, energy storage, and artificial intelligence (AI). Tesla’s stock has already returned 11,000% over its lifetime, and the future looks as bright as ever.

If you don’t wish to buy whole shares of the stock today, consider a stock broker that allows fractional shares so that you can invest a fixed dollar amount, regardless of whether the stock splits. Including Tesla in a long-term-oriented and diversified portfolio could help you enjoy the benefits of investing in several great companies.

Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.

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