Is Tesla Stock a Good Buy After Its 3-for-1 Split?

In June, Tesla filed its annual proxy statement with the Securities and Exchange Commission, and it included a provision for the company to split its stock 3:1. Shareholders approved the split on Aug. 5 and set Aug. 24 as the date for the split to occur. Shares began trading at the new, split-adjusted price on Aug. 25. What does this mean for Tesla shareholders? And if you’re not a shareholder, is it time to buy?

Here’s what you need to know.

How the Tesla Stock Split Worked

A company can split its stock if it thinks shares have become too expensive, preventing the average investor from buying it. By splitting the stock, existing investors will hold more shares but at a lower price per share.

It’s common to split stock 2:1, meaning that each shareholder gets two shares for each one they currently own, and each new share is worth half what the old ones were worth. True to its tendency toward the uncommon, Tesla initiated a 5-for-1 split in August 2020 — two years, nearly to the day, before the most recent split.

Note that the value of each investor’s position doesn’t change. If you have 10 shares of a $100 stock before a 2-for-1 split, you’ll have 20 shares of a $50 stock after the split. Your position is $1,000 in either case.

The 2022 Tesla Stock Split

Tesla’s latest split is 3:1. In the 2022 Tesla stock split, each shareholder as of Aug. 17 received a dividend of two additional shares for each share held on that date. The shares were distributed after the close of trading on Aug. 24 and began trading at their new, split-adjusted price when the markets opened on Aug. 25.

Shares were trading for $891.29 when the market closed on Aug. 24, according to Reuters. Shares opened at $302.36 on the 25th. Shareholders owned three times as many shares on the 25th as they’d owned on the 24th, with each share worth one-third of the price of a single share prior to the split. The value of each shareholder’s position thus remained unchanged.

Why Companies Split Stock

The reasoning behind the split is that a stock with a single share price of $900 or so can be psychologically prohibitive for some investors. The stock may feel overpriced at that level, so the company decides to divide the stock into small shares, each of which has a lower price.

Not every company agrees with this philosophy. Berkshire Hathaway has famously never split its stock, even as investors bid up the price. A single share of Berkshire Hathaway Class A stock (NYSE: BRK-A) closed at $424,290 on Sept. 1. However, Berkshire Hathaway also issues Class B stock, which gives investors a lower-priced alternative. The company’s Class B stock closed at $282.43 on the same day.

Is It a Good Idea To Buy Tesla Stock?

Tesla stock has been a wild ride. On Jan. 1, 2020, it was selling at $130.11. Two years later, the price was $936.72. However, if you bought Tesla on Nov. 1, 2021, you’d have paid $1,144.76. In fact, if you bought Tesla just about any time between November 2021 and June 1 of this year, your investment is down as of Sept. 2.

Analysts are, shall we say, split on the company’s prospects as well. Of the 45 analysts who followed the stock in August, as reported by Yahoo Finance, 26 rated it a “buy” or “strong buy,” 16 rated it a “hold” or “underperform” and three rated it a “sell.” Of the 23 analysts following the stock in September, eight rate it a “buy” or “strong buy,” 14 rate it a “hold” or “underperform” and one recommends selling.

This resulted in a recommendation rating of 2.3 on a scale of 1-5. The one-year average target price estimate is $298.80 in a range of $24.33 to $461. The price as of midday on Sept. 2 was $278.09.

Conventional wisdom says that a stock’s price usually rises a bit after it splits, simply because the split has the desired effect of allowing more investors to participate. This isn’t always the case, however, and the company’s fundamentals are a better indicator of how the stock price will behave after a split.

How Will the Split Affect Tesla Stock?

Whereas Tesla stock rose over 81% in the two weeks following its 2020 stock split, according to Benzinga, shares lost nearly 8% in the days following the announcement of the 2022 split. They were still down slightly on Aug. 24, and they fell more in the day or two immediately after the split before recovering slightly.

No one has a crystal ball, so it’s impossible to say what the stock will do in the coming weeks and months. It is safe to say, however, that since the split was announced, most of the impact had been largely “baked in” to the pre-split trading price. In other words, investors in the know were basing their purchases — and sales — of Tesla stock with the split in mind.

The company hopes that the lower price will encourage more investors to buy Tesla stock, and most analysts seem to think that could be the case. Some have increased their price targets as a result of the split. But even the most bullish are basing their predictions more on the market conditions and the company’s strength than the stock split. Bearish analysts are also looking primarily at the fundamentals.

Is Tesla a Good Growth Stock?

Tesla’s growth has been robust; that’s for sure. But it hasn’t been immune from the market pullback in recent months. And the back-and-forth between Elon Musk and Twitter has made the stock even more volatile than usual.

But the electric car market appears to be here to stay. And Tesla has been a leader in the technology required to make electric vehicles viable.

Institutional investors provide valuable insight into how Wall Street thinks a stock might perform, at least in the near term. Deutsche Bank and Jefferies both have indicated since the split that they’re maintaining their “buy” recommendations. Piper Sandler and Morgan Stanley have maintained their “overweight” ratings. Wedbush has maintained its “outperform” rating.

Is Tesla Good for Long-Term Investment?

The outlook for Tesla over the long term appears positive, according to most analysts. Even if the company’s growth trajectory continues on an upward trend, however, it’s unlikely to see the amount of growth the company has experienced in the last few years.

This is true of most companies, particularly those in the technology sector. They grow rapidly at first, but then growth slows down as more competitors enter the market.

But slower growth is still growth, and analysts seem to agree that Tesla remains well positioned to continue to grow over the long term. Investors should be prepared for some bumps along the way, however, if the company’s history is any indication.

Takeaway

The bottom line is that there may be little benefit to buying Tesla stock immediately after the stock split. The factors that make the stock attractive to investors are the company’s fundamentals and its ability to remain at the forefront of the technology that will bring electric vehicles into the mainstream.

Daria Uhlig contributed to the reporting for this article.

Data is accurate as of Sept. 2, 2022, and is subject to change.

This article originally appeared on GOBankingRates.com: Is Tesla Stock a Good Buy After Its 3-for-1 Split?