On Buying Tesla Now, Isn’t 6 the Same as Half a Dozen?

To manage perception about what each share of Tesla is worth and the valuation of the company, Tesla has announced a five-for-one stock split giving you five stocks for every 1 stock you own

If you bought shares of Tesla Inc. (NASDAQ:TSLA) at the start of the year, you would have scored an incredible 390% gains, almost four times your initial investment. In contrast, Bitcoin, with all the hype surrounding it has only delivered 58% YTD gains.

However, if you didn’t buy into Tesla at the start of the year when it was trading around $430, and if you haven’t joined the wagon until now, its incredible rally to the current trading price around $2,049 might leave you with regrets.

Right now, you’re probably torn between jumping in and hoping it is not too late, wishing that something will cause the price to fall so that you can buy at a cheaper price, or ignoring the stock with performative disdain.

Not so fast.

What if you could buy a $2000 stock for $400?

Elon Musk is a genius, he understands that the $2000 trading price might scare many people away - Tesla’s rally from $430 to $1000, and now $2000 has attracted a great deal of skepticism, pessimism, and outright vilification. It will be much harder for the stock to continue to $3000 or $5000 without the predictions of it being in a bubble becoming a self-fulfilling prophecy.

To manage perception about what each share of Tesla and the valuation of the company is worth, Tesla has announced a five-for-one stock split effective August 31. The stock split means that for every 1 share of Tesla that you currently own, you’ll get 5 new shares. 

When the stock split goes into effect, Tesla will be listed at a new trading price around $400, it will have more shares outstanding fivefold, but its valuation will remain largely the same until the stock trades up or down post-split. 

In essence, if you currently have 1 share of Tesla price around $2000, you’ll get 5 new shares priced around $400 each. For fractional investors who use platforms such as Robinhood or InvestBamboo, if you currently own 0.2 shares of Tesla priced around $400, you’ll have 1 full share of Tesla priced at $400 when the stock split happens.

In essence, the split doesn’t make Tesla cheaper, it only alters the perception of its affordability, but that’s another discussion and debate entirely.

Here’s what the rally could mean for Tesla

Tesla has never had a stock split, so we don’t have data on which we can postulate how it is likely to perform post-split. However, perhaps we can attempt to make some projections about Tesla’s stock split based on Apple’s historical split. Apple’s stock has been split four times in the past with 2-for-1 splits in June 1987, June 2000, February 2005, and a 7-for-1 split in June 2014. 

The last time Apple’s stock was split in 2014, its trading price started trending up between when the split was announced and when the split happened. The stock also continued it’s the trajectory for a few days after the split before it eventually settled down. 

Since Tesla announced the stock split on August 11, its trading price has skyrocketed by almost 50%; hence, there’s a decent chance that the rally will continue for a few days after the split. 

However, the main reason the rally will continue is that many new retail investors who have been eyeing Tesla’s 400% year-to-date gains will be more comfortable buying the stock at the new $400 trading price. Also, many shrewd stock traders will take advantage of increased interest from retail investors to squeeze out more trading gains.

Would you buy Tesla now or wait until after the split?

If you’ve bought Tesla at the start of the year or any time before the split was announced, you are already in the money. However, if you haven’t bought the stock until now, you’ve already missed a significant part of the opportunity. 

If you are looking for quick gains, I’m afraid the Tesla ship might have sailed and you may want to look for the next Tesla in the market. There’s also a significant risk that many of the professional traders with large portfolios might decide to take their YTD 400% gains or the 50% gains from the last two weeks off the table. Hence, I won’t be surprised if Tesla’s stock suffers a correction after the split.

Also, you shouldn’t buy Tesla because you think the post-split $400 trading price is ‘cheap’. Many stock trading and investing platforms already allow you to buy fractions of a share; hence, it doesn’t matter much if you buy 0.2 shares of Tesla today for $400 or 1 full share after the rally for $400. 

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I am a long-term investor and I encourage people to invest for the long term - if you are investing for the long term, what should determine whether you add Tesla to your portfolio or not is the company, it’s products, the management’s vision, financials, and long-term potential. 

Tesla is at heart a  tech company that happens to make cars, judging it’s valuation the same way traditional auto companies are judged may be somewhat wrong.

Tesla should have a place in your portfolio if you are confident that the company has decent odds of succeeding in its vision statement to “to create the most compelling car company of the 21st century by driving the world's transition to electric vehicles” and you are willing to sit tight for a bumpy ride over the next few years.