Why AI can’t be fooled by Tesla’s stock split

Key learning points

  • Shareholders vote Thursday in favor of proposed 3-for-1 Tesla stock split
  • Tesla shares gained 32% in July, pushing the stock up 49% from its May low
  • If the 3-for-1 measure succeeds, this will be Tesla’s second stock split in two years

Stock splits have been the name of the game for big tech since mid-2020. Major companies such as Nvidia, Apple, Amazon and Google have all divided shares after huge price gains. Now investors are getting ready for more another votes – this time for a repeat offender: Tesla.

Tesla stock split: what to know?

Tesla first announced plans for a new stock split in March as part of its annual proxy statement.

At the time, Tesla noted that “the stock split would help reset the market price” of its common stock. As a result, Tesla could give employees “more flexibility in managing their own assets” and “creating”. [its] common shares more accessible to [its] small shareholders.”

In June, Tesla revealed concrete hopes for a 3-for-1 stock split. Shareholders will vote on the proposal next Thursday (Aug. 4) at Tesla’s annual shareholder meeting. If it succeeds, this will be Tesla’s second split in as many years. (Tesla stock completed a 5-for-1 split in August 2020.)

In anticipation of the meeting, Tesla shares have already moved higher, with a 5% rise in price on Friday. On Monday, Tesla was up 1% in premarket trading and up to 5% in intraday trading, peaking at around $935.63. Towards the end, the stock rose just 0.04% for the session, closing at $891.93.

These numbers represent a 49% increase from May’s lows, with July alone showing a 32% increase. This exuberance comes amid broader optimism in the US stock market — and, of course, some buzz about the potential stock split.

What is a stock split?

So far, we’ve discussed Tesla’s plan for the stock split. Now let’s take a look at the logistics of what they want to do.

When a company generates wealth and value for investors, it often shows up in its share price. (That is, price increases.) In some cases — especially in profitable tech companies — stocks soar into the upper hundreds or thousands of dollars. Such high values ​​can price out retail investors’ prices, leaving little room for further future valuation.

To solve this problem, companies can perform a stock split.

A stock split occurs when a company divides its existing shares to create new shares. The split effectively lowers the price of each individual stock without changing the value of an investor’s investments or the company’s market capitalization.

Take Tesla stock, for example, which trades near $900. If the company did a 3-for-1 split tomorrow, each $900 share would be split into three stocks worth $300 each.

The purpose of a stock split

Technically, stock splits don’t add value – the split itself is cosmetic. The company’s valuation remains the same, as does the value of investors’ investments. So why would you do it?

The answers: affordability, liquidity, growth and psychology.

Increased affordability

One of the reasons companies split stocks is to lower the prices per share. By doing this, retail investors can more easily afford whole stocks without breaking the bank.

Take Google’s recent stock split. The Friday before the split, the stock closed close to $2,200 – well out of reach for many investors. But when the stock split 20-for-1, Google opened about $112 the following Monday.

These types of stock splits also give employees who receive share-based compensation — as many do at Tesla — more flexibility in determining their benefits.

Increased liquidity

Stock splits can also help with the liquidity of a company’s stock. Although the split does not directly add value, it is is doing increase the number of shares in circulation. That provides more “lubrication” and allows investors to trade more freely.

Room for growth

Companies can also split stocks to give stocks more room to grow, especially if they see a bigger profit coming. At a more affordable entry price, more investors can get in, increasing demand — and appreciation — over time.

In addition, as the company innovates and grows, cheaper stocks have more room to move upwards, allowing it to profit organically from regular business.

Investor Psychology

Companies can also split stocks (at least in part) to take advantage of investor psychology.

Apart from that, companies that have enough growth to justify a split are often seen as companies with more upside potential. Stock splits also create situations that lead to higher demand, increasing a company’s desirability, its stock price, or both.

(Some analysts speculate that this played a role in GameStop’s recent 4-for-1 stock split.)

What Tesla’s stock split means for investors?

Stock splits don’t greatly affect market value – at least theoretically. After all, the purpose of a stock split is to increase the shares outstanding without affecting the value or market capitalization.

But in reality, stock splits can lead to increased short-term price volatility and higher investor expectations. And in the long run, stocks that are split gain an average of 25% over the next year, compared to an average 9% gain in non-split stocks.

While the additional gains could be the result of organic growth (since companies that break up often factor in likely future success), investor psychology and lower starting stock prices may also play a role.

But with Tesla, we can look to the past to get an idea of ​​its potential future performance.

In August 2020, Tesla completed a 5-for-1 stock split. Between the announcement and the execution date, Tesla shares rose 60%, from $1,300 to $2,000 per share. After the split, the stock quickly grew from its $460 “reset” value, nearly doubling in a year.

Now, two years later, the stock is still close to $900. (Tesla has lost some stock price thanks to financial results due to pandemic factors such as Covid lockdowns and supply chain issues. CEO Elon Musk’s Twitter habits—both his tweets like his desire to buy the social media company — may have played a part, too.)

With Tesla retaining nearly double its valuation after the split, Tesla investors could get some good news. While past performance is not a predictor of future results, this stock split could see investors holding twice as many shares at twice their value within a few years, if Tesla’s trend holds.

Why AI can’t be fooled by Tesla’s stock split

If passed on Thursday, Tesla’s move will mark the company’s second stock split in two years. And admittedly, it’s tempting to view the frequency of stock splits as a testament to the company’s operational success.

But, as we discussed above, stock splits are mainly cosmetic. They don’t increase a company’s value, stock price, or fundamentals. (At least not directly – although stock splits can) lead to stock volatility, price increases and increased trading volume.)

In addition, we found that investor psychology may play a role, either in the company’s decision to split or in the aftermath of the split. Investors may view split stocks as a sign that the company sees future profits, flocking to the stock and thereby fulfilling their own predictions.

In other words, stock splits change nothing but the number of shares floating around. But for some investors, this fact alone creates a perception that the stock is a better “value.”

That’s where Q.ai’s AI comes in.

AI is by definition emotionless – after all, it is artificial intelligence. That means it won’t get caught up in the buzz and hassle surrounding events that could affect your portfolio. Instead, AI analyzes situations through a numbers and pattern-based lens to identify trends and probabilities.

Using this data-based approach, our AI can easily sift through the hype of a stock split to look at cold, hard facts. In practice, this means our investment AI follows trends when momentum can support it, but doesn’t get bogged down in false stories when the hype is overblown.

Invest when the trend is right with Q.ai

Stock splits often attract investors to high-growth companies. But falling for buzz alone is a good way to make a bad investment. Just because a company (or its CEO) is expensive or famous enough to split doesn’t mean it’s a profitable long-term prospect.

If you want to invest in high-tech companies without worrying about the hype — or price — Q.ai has the answer. Our data-backed Investment Kits, such as our Emerging Tech and Clean Energy Kits, invest in green, high-performance and/or breakthrough technology (such as Tesla) that is worthy of your portfolio.

At the same time, you can rest easy knowing that we never invest solely on hypes. Sure, we’ll go where the momentum takes us, but only if the foundations and performance are there to keep us afloat.

Download Q.ai today to access AI-powered investment strategies. If you deposit $100, we will add an additional $50 to your account.

Leave a Comment