Tesla, Amazon, And The Problem With Stock Splits

This stock market upheaval could affect your wealth for the next decade. Here’s what’s happening, and

what it could mean for your money.

Key Takeaways:

• Amazon completed a stock split this month. Tesla just announced one. 
• Splits make a stock’s price per share more affordable. 
• However, they don’t actually make the stock cheaper. 

What Happened: Amazon.com (AMZN) completed a 20-for-1 stock split last Monday. On Friday, Tesla (TSLA) proposed a 3-for-1 split. Shareholders will vote on the move at the company’s annual meeting in August. 

Stock splits are all the rage these days. For example, Alphabet (GOOG) (GOOGL) will split 20-for-1 on July 1. Shopify (SHOP) will split 10-for-1 on June 29. 

What Happens: Pretty simple. Let’s say you own 100 shares of a $1,000 stock that splits 10-for-1. After the split, the market price of the stock drops to $100, however you’ll now own 1,000 shares of the stock. Therefore, the value of your position – $100,000 – doesn’t change.   

The Problem With Stock Splits

It comes down to investor perception, fueled not only by a company’s main motivation to split, but by inconsistent, if not sloppy media coverage. 

For example, consider two recent stories on stock splits, both from CNN’s business news unit. 

Here’s the headline of the first one: 

Source: CNN

And the second one: 

Source: CNN

The second headline effectively corrects the first. 

When a company conducts a stock split, it makes its shares more affordable. Not cheaper. From a valuation perspective, nothing changes. All a stock split does is increase the number of a company’s outstanding shares and decrease the market value of each share. The value of the company itself and your position in that company doesn’t change. 

However, from a psychological standpoint, stock splits can have a real impact. Tesla shares will feel less expensive and more financially accessible to many everyday investors at, say, $233 rather than $700 per share after a 3-for-1 split. 

This is the main reason why companies split their stock. To attract retail investors. 

How Do Stocks Perform After Splits?

Source: Schaeffer’s Research

Schaeffers’ Investment Research looked at the data and found that, compared to the broad market, stocks that split underperform in the near-term and fail to meaningfully outperform over the long-term. There’s no significant difference between more common 2-for-1 splits and these recent 10- or 20-for-1 splits. 

There’s no conclusive data on stock price action after an announcement such as Tesla’s and when the actual split occurs versus the aftermath of a split. 

The Bottom Line: Trying to benefit from a stock split – whether you buy before or after the actual split – amounts to timing the market. You’ll win some. You’ll lose some. Not a sound long-term strategy. 

You’re better off buying Tesla – or any other stock for that matter – on the basis of your conviction, not the cosmetics of the stock’s market price. Particularly in an investing environment where you can purchase fractional (less than one whole share) shares of a stock. Your fractional position size could grow to greater than one share post-split.

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