Recent Stock Splits: The Motives of Tesla and Apple
With the recent share prices of Big Tech soaring as a result of their strong quarterly results, the issue of share splits has been thrust back into the limelight.
Following Apple’s announcement of its fifth stock split in history on the 31st July, Tesla has likewise announced its first stock split on 11th August 2020. Two weeks ago, Apple announced a four-for-one stock split as its share prices increased to above $400. Similarly, Tesla has decided to split its stock five-to-one following Tuesday’s after-market rally which lifted Tesla shares to $1,475.
Why is this happening?
In essence, a stock split is a corporate action which allows the company to divide its current existing shares into multiple shares to boost the liquidity of the stocks. The stock split is a decision made by a company’s board of directors to increase the number of shares that are outstanding by issuing more shares to current shareholders.
In theory, an announcement of the stock split should not make much of a difference because it does not change the overall value of the business. However, reducing the price of each share can be seen to be an effective way to make the shares more attractive to small shareholders such as retail investors. Furthermore, it can also be seen as a sign of confidence as it indicates that management anticipates future market gains.
Both Apple and Tesla have announced the stock splits in a bid to make their shares more affordable. Apple stating that its decision was to make its shares “more accessible to a broader base of investors”. Likewise, Tesla said that the split is “to make stock ownership more accessible to employees and investors”.
Therefore, the aim of the stock split is to woo investors who have been put off by the price of a single share. However, it has to be said that the current prices have not exactly put off many investors so far; over 40,000 traders who use Robinhood’s investing app bought Tesla shares in one 4-hour window last month.
What does this mean for investors?
To investors, this means that the new share prices are more affordable. Roughly, Tesla stocks will be valued at $300 and Apple stocks at $100 each. As a result, more retail investors can look to buy these shares.
To investors that already own shares in the companies, they will just own more shares. However, each share is proportionately worth less. As a result, the stock split will not change the aggregate value of what the shareholder owns or the market capitalisation of the company.
The Future
After Apple revealed its stock split, Apple’s stock has risen so far it has become the world’s most valuable public company yet again. Tesla may be looking for a similar increase through winning over investors who have been buying its rival’s cheaper shares. The news of the stock split has led to a 7% jump in Tesla shares. Notably, this announcement of Tesla’s stock split comes soon after Chinese electric vehicle manufacturer, XPeng, has announced its plans for an IPO on the New York Stock Exchange to compete against Tesla.
Looking to the future, both Apple and Tesla appear to be going from strength to strength. Tesla’s share price has had an 87-fold increase from the $17 per share at the company’s IPO in 2010 with an increased likelihood to make further gains as the electric vehicle industry gains traction.
Interestingly for Apple, there have also been major gains. This quarter, Apple has reported that iPhone sales only accounted for 44% of its quarterly revenue; down from 70% in early 2018. These figures confirm that Apple has been overwhelmingly successful in pushing into companion devices and services. The company is no longer product-driven and Apple has become increasingly diversified.
Thus, it appears that the future is looking good for both these US giants.
By Bobby Zhu