Apple and Tesla’s stock split has many potential investors scratching their headlines — and understandably so. One the one hand, it looks like an easy buying opportunity. On the other, the move raises predictable uncertainty.
A stock split is a decision by a board of directors to increase the number of shares in a company by dividing up its existing shares into cheaper portions, or splits.
For example, two big players in the S&P world, Apple and Tesla, recently split their stock:
- Apple, whose stock was trading at more than $500 per share, sliced their shares into a 4-for-1 stock split, dropping the price per share to around $130 after climbing back from $125 right after the split.
- Tesla’s individual stock price was an electrifying high of $2,200 per share. Tesla went for a 5-for-1 stock split. Individual share prices for Tesla have slipped somewhat to about $432, coming back from a low of about $436.
So, what should investors infer from those stock splits?
The obvious inference is that both companies were doing well and wanted to make their stock prices more affordable to the average investor. That so-called affordability should be viewed with caution, however. Stock splits don’t buy a bigger chunk of the company, just smaller pieces of it at a lower price.
Average investors, some argue, are better off putting their money into index funds that contain multiple companies. Trying to make profits by jumping around and cherry-picking companies, they argue, can be hazardous.
Apple could go the way of Blockbuster if some new technology shuts down the iPhone. But the upcoming 5G promises super-fast connections and billions of users are always ready for trade-ins as new iOS technology juices up their gadgets.
Tesla electric car technology is promising, and a new battery technology could make its cars cheaper. On the other hand, as long as gasoline is cheap and plentiful, don’t look for electric vehicles to completely replace fossil-fuel powered commerce across the wide-open spaces of America.
Stock splits, on the other hand, could spur additional gains for Apple and Tesla by virtue of lowering the price. Also, the trading psychology of the stock market is that where there is a bargain, buyers rush to buy. Nevertheless, since stock splits don’t increase a company’s value, historically companies who have gone that route over the past 60 years saw in increase in their average share price of 33% in the following 12 months.
Tech stocks like Amazon and Microsoft are at all-time highs and are getting stronger. Apple has split its shares four times in the past and its average performance increased ten percent during the next twelve months. As those big tech players—Amazon, Google, Facebook, and Netflix–continue to flourish, they could see a rally as high as 25 percent through 2021 and beyond.
So, the Apple and Tesla stock splits may be more a symptom of an economy responding with money to invest, despite the coronavirus. In fact, stock splits used to happen more often, but with the dominance of passive mutual funds and exchange-traded vehicles, investors would rather float than tether their fortunes to individual players.
For those who are more adventurous, buying more Apple shares at the lower price is probably a safe investment, given the predictions that its market share could rise to 21 percent during the next three years.
Likewise, Tesla stock is no more or less valuable because of the split. It’s just cheaper. Tesla still sells $50,000 vehicles with a shocking $80,000 price on its SUV. Tesla has a market capitalization of $426 billion with sales and net income of just $25.7 billion and $368 million, respectively.
Investors may have been overly optimistic about Tesla’s potential, but continued under-performance could cause investors to do their own splitting a few years from now.