Why AI Can’t Be Fooled By Tesla’s Stock Split

Key takeaways

• Shareholders will vote for the proposed 3-for-1 Tesla stock split this Thursday
• Tesla shares gained 32% in July, bringing the stock up 49% from May’s low
• If the 3-for-1 measure passes, 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 like Nvidia, Apple, Amazon and Google have all divided shares following enormous price gains. Now, investors are gearing up for yet another vote – this time, for a repeat offender: Tesla.

Tesla stock split: what to know

Tesla first announced intentions for another stock split back 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 equity” and “make [its] common stock more accessible to [its] retail shareholders.”

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

Already, Tesla shares have trended higher in anticipation of the meeting, with Friday seeing a 5% price jump. On Monday, Tesla rose 1% in premarket trading and as high as 5% in intraday trading, peaking around $935.63. By close, shares sat up just 0.04% for the session, closing at $891.93.

These numbers represent a 49% mark-up from May’s lows, with July alone seeing a 32% gain. This exuberance comes amid broader optimism in the U.S. stock market – and of course, a bit of buzz about the potential stock split, too.

What is a stock split?

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

When a company generates wealth and value for investors, that often crops up in its share price. (I.e., price appreciation.) In some cases – especially in profitable tech firms – shares rise into the upper hundreds or thousands of dollars. Such high values can price out retail investors and leave little room for further future appreciation.

To solve this problem, companies may conduct 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 share without changing the value of an investor’s holdings or the firm’s market cap.

For instance, take Tesla stock, which is trading near $900. If the company were to execute a 3-for-1 split tomorrow, each $900 share would split into three shares worth $300 apiece.

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’ holdings. So, why do it?

The answers: affordability, liquidity, growth and psychology.

Increased affordability

One reason companies split stock is to lower per-share prices. In doing so, retail investors can more easily afford whole shares without breaking the bank.

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

These kinds of stock splits also give employees who receive stock-based compensation – as many at Tesla do – more flexibility in enacting their benefits.

Increased liquidity

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

Room for growth

Companies may also split stock to give shares more room to grow, especially if they see increase profits ahead. At a more affordable entry price, more investors may pile in, increasing demand – and appreciation – over time.

Plus, as the company innovates and grows, cheaper shares have more upside wiggle room, allowing it to benefit organically from regular operations.

Investor psychology

Firms may also split stock (at least in part) to benefit from investor psychology.

All else aside, companies that have enough growth to warrant a split are often viewed as having more upside potential. Stock splits also create situations that lead to higher demand, thus boosting a company’s desirability, share price or both.

(Some analysts speculate that 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 impact market value – theoretically, at least. After all, the goal of a stock split is to increase outstanding shares without affecting value or market cap.

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

While the additional gains may be due to organic growth (since companies that split often consider likely future success), it’s also possible that investor psychology and lower starting share prices play a role, too.

But with Tesla, we can look at its past to clue into its potential future performance.

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

Now, two years later, the stock still sits at nearly $900. (Tesla has lost some share price thanks to financial results stemming from pandemic factors like Covid lockdowns and supply chain issues. CEO Elon Musk’s Twitter habits – both his tweets and his desire to buy the social media company – may have also played a role.)

With Tesla remaining at nearly double its post-split valuation, Tesla investors could be in for good news. While past performance doesn’t predict future results, if Tesla’s trend holds, it’s possible that this stock split could see investors holding twice the stock at twice the value in a few years – again.

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

If Tesla’s measure passes on Thursday, it will make the company’s second stock split in two years. And admittedly, it’s tempting to view the frequency of stock splits as testament to the firm’s operational success.

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

Additionally, we’ve established that investor psychology can play a role, either in the company’s decision to split or in the post-split aftermath. Investors may view split stocks as a sign that the company sees future profits, flocking to the stock and thereby fulfilling their own prophecies.

In other words, stock splits don’t change anything but the number of shares floating around. But for some investors, this fact alone drives the perception that the stock is a better “value.”

That’s where Q.ai’s AI comes in.

By definition, AI is unemotional – after all, it’s artificial intelligence. That means it doesn’t get caught up in the buzz and hullaballoo surrounding events that could impact your portfolio. Instead, AI analyzes situations through a numbers- and pattern-based lens to establish trends and probabilities.

By 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, that means our investing AI rides trends when the momentum can back it up – but doesn’t get stuck on false narratives when the hype is overblown.

Invest when the trend is right with Q.ai

Stock splits often draw investors to high-growth companies. But falling for buzz alone is a good way to get into 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-value tech firms without worrying about the hype – or price – Q.ai has the answer. Our data-backed Investment Kits, like our Emerging Tech and Clean Energy Kits, invest in green, high-performance and/or breakthrough technology (like Tesla) worthy of your portfolio.

At the same time, you can rest easy knowing that we never invest on hype alone. Sure, we go where the momentum takes us – but only if the fundamentals and performance are there to prop us up.

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