Think you can’t afford to buy Tesla shares? Think again…

A male investor sits at his desk looking at his laptop screen holding his hand to his chin pondering whether to buy Macquarie shares

A male investor sits at his desk looking at his laptop screen holding his hand to his chin pondering whether to buy Macquarie shares

Tesla Inc (NASDAQ: TSLA) shares have become one of the most famous investments in the world over the past few years.

Helped by a number of factors, including the company’s breakneck growth, the… eccentricities of Tesla CEO Elon Musk, and sometimes feverish dedication from its base of retail investors, Tesla shares have long been one of the most-watched stocks on the US markets.

The elephant in the room is of course the life-changing stock price gains this company has given investors in recent years. Back in 2019, the electric vehicle and battery manufacturer was a US$40 stock. Today, it has just closed at US$925.90 a share, representing a gain of almost 2,000% over the past three years.

Late last year, Tesla shares reached a record high of US$1,243.49 each, which was a gain approaching 3,000% from the benchmark we just discussed. As the company stands today, Tesla is now the fifth-largest share on the US markets by market capitalisation.

It’s now larger than companies like Johnson & Johnson and Warren Buffett’s Berkshire Hathaway.

But right now, the Tesla stock price could be described as prohibitively expensive for many investors. After all, an investor wanting to open a position in Tesla would need US$925.90 (or almost $1,324 in our currency) just to buy a single share.

Well, that looks like it is about to change.

Tesla announces three-for-one stock split

According to reporting in Forbes, Tesla shareholders have just approved a stock split for the company.

A stock split is where a company ‘splits’ and reissues its shares at a lower price. The volume increases but the value decreases. To use the common metaphor, it is akin to reslicing a pizza into smaller slices. The overall valuation of a company doesn’t change, only the number and individual value of the shares.

In Tesla’s case, a three-for-one split was approved. This means that when the split takes effect, Tesla’s share count will be increased by a factor of three, which means that each share will be worth a third of what it used to be.

So if an investor owned 10 Tesla shares, each worth US$925.90 today, they would own 30 Tesla shares, each worth approximately US$308.63, if the split went ahead.

As you can see, the investor still owns a total of US$9,259 worth of Tesla under either scenario. Thus, the ‘size of the pizza’ remains the same.

So why do companies do stock splits then, if the outcome is so inconsequential?

How does a stock split benefit Tesla shares?

Well, a smaller individual stock price can increase the liquidity of a company’s stock, for one. It also helps smaller, individual retail investors access the now-cheaper shares. Additionally, it creates some publicity for the company too (here we are talking about it).

In the past, we have seen many different stocks rally after the announcement and execution of a stock split. That’s despite the fact it does not increase the underlying fundamental value of a company, as we’ve discussed.

Tesla is not the only big-name company to undertake a stock split in 2022. We’ve also seen stock splits from Amazon.com Inc (NASDAQ: AMZN) and Alphabet Inc (NASDAQ: GOOG)(NASDAQ: GOOGL) this year. Both of these were 20-to-1 splits.

Indeed, it was only back in 2020 that Tesla undertook its last stock split, a five-to-one division at the time. We don’t know yet when this latest split will take effect, but no doubt the company will announce this soon.

Tesla shares remain down close to 23% in 2022 thus far, although the company has rallied by almost 33% over the past month alone.

At the company’s last stock price, Tesla has a market capitalisation of US$967.1 billion.

The post Think you can’t afford to buy Tesla shares? Think again… appeared first on The Motley Fool Australia.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Motley Fool contributor Sebastian Bowen has positions in Alphabet (A shares), Amazon, and Tesla. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet (A shares), Alphabet (C shares), Amazon, and Tesla. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), and Amazon. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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