Tesla Stock Split: Is It a Good Buy Before or After?

In June, Tesla filed its annual proxy statement with the SEC, and it included a provision for the company to split its stock 3:1. The split will be voted on by the shareholders at Tesla’s annual meeting on August 4, 2022. What does this mean for Tesla shareholders? And if you’re not a shareholder, is it time to buy? Should you buy before or after the split?

Here’s what you need to know.

How the Tesla Stock Split Will Work

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. Note that the value of each investor’s position doesn’t change.

The Tesla Split

Tesla’s plan is to split their stock 3:1. Here’s how that will work:

Tesla stock closed at $752.29 on July 8, 2022. If the price is the same on the date of the split, each share would become three shares, each worth $250.76. Each shareholder would have three times the number of shares they had previously, with each share worth one-third of the price of a single share prior to the split. The total value of the investor’s Tesla position would remain unchanged.

Why Companies Split Stock

The reasoning behind the split is that a stock with a single share price of $750 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 on July 8, 2022, at $421,800.00.

Is it a Good Idea to Buy Tesla Stock?

Tesla stock has been a wild ride to date, especially in the last few years. On January 1, 2020, it was selling at $130.11. Two years later, the price was $936.72. However, if you bought Tesla on November 1, 2021, you’d have paid $1,144.76. In fact, if you bought Tesla just about any time since September 2021, your investment is down as of July 8, 2022.

Analysts seem to be, shall we say, split on the company’s prospects as well. Of the 45 analysts following the stock in June, 12 rated it a strong buy and 12 rated it a buy. Twelve others said to hold the stock. Six analysts said it was underperforming, and three recommended selling it.

This resulted in a recommendation rating of 2.5 on a scale of 1-5. The one-year target price estimate is $893.46.

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.

Is Tesla Doing a Stock Split in 2022?

The company wants to split the stock 3:1 but needs shareholder approval to do so. The annual stockholder meeting is scheduled for August 4, 2022, which is when the vote will take place. If shareholders approve the split, it will happen. The date for the split has not yet been set.

Tesla has split its stock once before. On August 31, 2020, the stock split 5:1. Prior to the split, it had been trading at $2,213 per share. After the split, each share traded at $498.32, indicating an increase in response to the split.

Is it Better to Buy Tesla Before or After the Stock Splits?

No one has a crystal ball, so it’s impossible to say what Tesla stock will do immediately before or after the stock splits. It is safe to say, however, that since the split has been announced, most of the impact of the split has been largely ‘baked in’ to the current trading price.

In other words, investors in the know are basing their purchases — and sales — of Tesla stock with the split in mind.

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. UBS and CFRA Research recently upgraded the stock, with CFRA Research providing a price target of $1,200 per share before the split, based on the company’s potential for long-term growth.

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 two to three 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 before or 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.

This article originally appeared on GOBankingRates.com: Tesla Stock Split: Is It a Good Buy Before or After?