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Tesla announces a 5-for-1 stock split and shares soar again

Why stock splits used to be a thing, but not so much anymore

Wall Street analysts praised Tesla's move to split its richly valued stock into smaller chunks, saying it had the potential to extend a 200% rally in its shares this year by making it easier for retail investors to hold the stock.

Shares in the electric carmaker rose more than 6% in early trading. The stock, which traded at around $1,467 before the bell on Wednesday, is among the highest priced on Wall Street.

The five-for-one split — Tesla's first — comes at a time when analysts and investors have expressed concerns over the stock's high valuation in the market despite cash burn concerns.

"The move makes sense for Tesla, as it will make its shares cheaper and more accessible to young first-time retail traders using platforms like Robinhood," said Jesse Cohen, senior analyst at Investing.com.

"While stock splits are typically non-events for investors, the reaction seen in Tesla's stock following the announcement underlines the surging demand from the Robinhood-retail traders to get in on fast-growing tech names."

Tesla's move follows a four-for-one split announced by Apple Inc in late July, the iPhone maker's first stock split since 2014.

"We believe institutional investors have turned the corner in a positive direction as Musk & Co. have not just talked the talk but walked the walk on its Model 3 sales and profitability trajectory over the last year despite COVID," Wedbush analyst Dan Ives said.

The world's most valuable carmaker posted stellar quarterly results last month, setting it up to be included in the S&P 500 index.

Twelve of 33 analysts covering the stock rated it at "sell" or lower, and just eight rated it at "buy" or higher. The median price target for the stock is $1,300, up from $615 in May.

Stock splits are a way for companies to make shares more accessible to retail investors, potentially attracting individual investors who make small trades. However, brokerages increasingly let customers buy parts of shares, making the benefit of share splits less clear than in the past.

Stock splits have become rare on Wall Street in recent years, with just three S&P 500 components announcing splits in 2020, compared with an average of 10 a year over the past decade, according to S&P Dow Jones Indices.

Tesla in July posted a second-quarter profit as cost cuts and strong deliveries helped offset coronavirus-related factory shutdowns, clearing a hurdle that could lead to the carmaker's inclusion in the S&P 500 index.

While many institutional investors have avoided Tesla's stock in recent years due to a lack of consistent profitability, the company has a strong following among individual investors.

Over the past 30 days, Tesla was second only to Apple as the most popular stock on the Robinhood trading app, according to Robintrack, a website that tracks Robinhood holdings.

Tesla's stock split should not affect S&P Dow Jones Indices' potential decision to add the company to the S&P 500, which is weighted by companies' overall stock market values.

The share split will not make Tesla any less expensive in terms of actual earnings it delivers to investors. The stock currently trades at 112 times expected earnings over the next 12 months, according to Refinitiv. By comparison, GM is valued at eight times expected earnings, and Ford at 45 times expected earnings.

 

 

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