Tesla (NASDAQ:TSLA) stock is in a bit of a tailspin recently. Since topping $1,200 per share last fall, Tesla shares have fallen to the mid-$600 range per share today. Despite that recent decline, however, the stock has still rallied tremendously over a longer term horizon.
As a result, Tesla’s management announced a forthcoming three-for-one stock split on Friday. Will this upcoming stock split be enough to get Tesla stock moving forward again? Here’s what you need to know.
Tesla Asks for Shareholder Approval
First off, the proposed split isn’t a done deal yet. Oftentimes, companies simply announce a stock split and that’s that. However, in this case, Tesla needs to obtain shareholder approval to execute its planned stock split.
This is because Tesla currently has a cap at a maximum of two billion authorized shares of outstanding Tesla stock. However, there are currently 1,036,390,569 shares of existing TSLA stock. This means that Tesla will have roughly 3.1 billion shares of stock after its proposed split, which is well over the present two billion cap. Thus, Tesla is requesting shareholder approval for an Authorized Shares Amendment to lift the permittable outstanding share count well above three billion. There’s no reason to think, however, that shareholders would fail to approve this request.
Why Is Tesla Splitting its Stock?
Tesla stock has been trading at a high nominal price for quite awhile. So what explains the company’s move to split the stock right now? In its proxy statement, Tesla called out its employee compensation as a primary driver behind the move:
“We believe the Stock Split would help reset the market price of our common stock so that our employees will have more flexibility in managing their equity, all of which, in our view, may help maximize stockholder value. In addition, as retail investors have expressed a high level of interest in investing in our stock, we believe the Stock Split will also make our common stock more accessible to our retail shareholders.”
In addition, as that statement highlights, Tesla believes this will make TSLA stock more appealing for retail investors. And that’s probably true. Here’s why.
What’s it Mean for Tesla Shareholders?
In a stock split, the value of your investment doesn’t change. If you own 100 shares of Tesla stock at $750 per share on the day of the split, for example, you’ll own 300 shares at the new split price of $250 once the transaction goes into effect. In each case, the underlying stock is worth $75,000.
While the stock split itself doesn’t change an investment’s value, it can change sentiment. As Tesla’s explanation above showed, it may help newer employees feel that the shares are still at an accessible price to invest in. Same goes for some investors who may not have much capital to work with. A $250 stock feels more approachable than a $750 one.
Finally, there’s an impact in the options market, as well. To buy a call option on Tesla, for example, it often costs thousands of dollars per contract due to the high stock price of the underlying company. Making Tesla’s stock cheaper will also make its corresponding options more affordable for average retail traders. As much of Tesla’s overall trading activity occurs in put and call options, this split could help level the playing field for smaller investors.
TSLA Stock Verdict
To be clear, splitting one’s stock isn’t a foolproof move. Amazon.com (NASDAQ:AMZN), for example, just issued a 20:1 stock split of its shares and that did nothing to support the stock price. AMZN stock fell 12% during the week as the split went into effect. So, to be clear, prevailing market conditions can outweigh factors such as a stock split.
In general, however, a stock split should be a positive event for a company’s share price on average. And with Tesla shares down so sharply in recent months, any sort of positive catalyst could be enough to turn things around. It’s not just the stock split either. On Friday, UBS (NYSE:UBS) upgraded TSLA stock and gave it a $1,100 price target. These factors could give Tesla a boost in coming weeks.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.