If approved, it will be the electric vehicle maker’s second stock split in the space of two years.

In keeping with a number of other names that have split their stock recently, including Alphabet (NASDAQ: GOOGL) back in February, Tesla intends to seek approval “for an increase in the number of authorized shares of common stock…in order to enable a stock split of the Company’s common stock in the form of a stock dividend”. 

What does it all mean for investors?

How does Tesla intend to split its stock?

Details surrounding the proposed stock split are relatively limited at this stage, with the company only announcing the potential move through Twitter, and in a regulatory document called a Form 8-K, which it filed with the Securities and Exchange Commission (SEC).

It isn’t the first time that Elon Musk has delivered price-sensitive news straight into the Twittersphere, including recent intentions to sell down his holding, even if the SEC hasn’t looked on with amusement. In this instance, however, it was the company’s official Twitter handle that tweeted the news.

Nonetheless, Tesla has yet to propose a stock split ratio – the amount by which Tesla shares on issue would multiply – nor a timeline on the proposed move. Because the stock split requires approval, it means that the event cannot occur before the company’s 2022 annual shareholder meeting. 

Last year, the Tesla AGM was held in early October. Allowing for a similar timeline, the vote could occur in October this year, and then it would likely still be some weeks before the stock split would be enacted. That means shareholders are likely looking at the end of 2022 at the earliest in terms of a stock split.

In the meantime, the company’s Board has already unofficially endorsed the move, and it will be up to shareholders to give it the green light as well, with TSLA shareholders expected to be afforded the opportunity to vote on the measure.

It’s worth noting, the company intends to conduct a stock split through a stock dividend. Unlike a traditional dividend, which is paid in cash, a stock dividend is consideration given to shareholders in the form of additional shares in the company, and as such, dilutes the stock price rather than affecting the value or market capitalisation of the company.  

Why does Tesla plan to split its stock again?

This is the big question that many have been speculating!

A stock split doesn’t change any of the fundamentals of a company. The business issues more shares to effectively reduce the share price in an artificial manner. This provides retail investors with scope to buy more units in the stock, at least in whole units.

However, the bigger driver is often born out of investor psychology. Despite absolutely no differences to the company’s assets, value or the like, retail investors are often drawn by the allure of a high-quality stock trading at a lower price and the fact that movements from a smaller price represent a bigger percentage change. 

Elon Musk would potentially be giving consideration to the fact a stock split may further increase the popularity and demand for TSLA shares among retail investors – especially in light of the share price performance since the last stock split.

Post stock-split, a stock may appear ‘cheaper’, but the company is fundamentally the same as it was before, and the decrease in the stock price is offset by the issuance of more shares. This is why it is always important to focus on a company’s market capitalisation, which is a consistent benchmark throughout a stock split, and in comparing different stocks for that matter.

How have Tesla shares performed since the last stock split?

The last time Tesla conducted a stock split was August 31, 2020. Back then, the company effectively undertook three corporate actions in the space of a quarter. First, it sold an additional US$5 billion worth of stock. Then, it conducted a 5-for-1 stock split. And finally, Tesla then raised another US$5 billion by way of another stock issue.

Shares in Tesla have soared since the company’s last stock split, up around 150%. Looking even further back, TSLA shares were floated at US$17 back in 2010. On a pre-consolidated basis, the stock would be worth nearly US$5,500 today, an increase of more than 32,000%.

Immediately after the news surrounding this latest potential stock split, shares in Tesla jumped sharply higher, cementing the company’s valuation well and truly above US$1 trillion. In fact, the company’s market cap increased by as much as the entire value of auto industry peers like General Motors Company (NYSE: GM) and Ford Motor Company (NYSE: F).

All the while, the development comes at a time when business is booming for Tesla. It has just opened its new Gigafactory in Germany and is about to replicate that feat in Texas, USA. The company has consistently boosted its production at existing facilities as demand for electric vehicles surges, and it has successfully passed on a series of price hikes over the last year to sustain industry-leading gross margins.

One thing is clear – there is never a dull moment for Tesla shareholders.