Last Monday, SEC filings revealed Tesla (NASDAQ: TSLA) was seeking shareholder approval for yet another stock split, the second in two years.
Even with nothing yet official, investors hailed the news. Shares in Tesla rose 8%, with the automaker adding $84 billion in market cap by the end of trading last Monday.
As if in response to Tesla, GameStop (NYSE: GME) announced Friday that it would be seeking shareholder approval for its own stock split, sending shares surging 15%, before settling back into the negative by the end of the trading day.
Stock splits have come to the fore of late, often attracting a surge of retail interest. Both Google (NASDAQ: GOOGL) and Amazon recently announced 20-to-1 stock splits, with Amazon (NASDAQ: AMZN) adding 5% to its share price on the day of its announcement.
Investors often perceive news of a split as heralding future growth in a company. "It has this connotation that a stock isn't splitting unless the company is successful and they expect the price to go even higher and higher," Jamie Cox, managing partner for Harris Financial Group, told the Wall Street Journal.
Regardless, growth is not guaranteed. A stock split merely divides a company's outstanding shares into smaller pieces, but nothing fundamental about the company changes.
Research from Bank of America has shown that companies fare 16% better than their peers in the 12 months after a split; however, this is likely a matter of correlation rather than causation.
Tesla is splitting its shares for the second time in two years, a rate that's nearly unprecedented. There might be a number of reasons for this pace. One could be to make shares more affordable for retail investors. However, the rise of fractional trading makes this contention rather moot.
However, retail investors, whose speculation has allowed Tesla to become the world's first trillion-dollar auto company, often perceive splits as a "ground-floor" opportunity of sorts.
"People get a psychological boost when they hear about a stock split," Eric Diton, president and managing director at The Wealth Alliance, told the Journal. "They love the idea of buying X number of shares knowing that in a month or in a reasonable period of time they're going to own five times, 10 or 20 times that number of shares."
The split might also help Tesla recruit new talent, as the company is known to pay and incentivize employees with stock.
"A lower-priced stock makes it easier for employees with equity as part of their compensation to sell a more specific amount to satisfy tax liabilities and manage their personal wealth," Nicholas Colas, co-founder of DataTrek Research, told Bloomberg.
Many questions about Tesla's proposed second split remain, in particular, at what ratio will Tesla divide its shares? SEC guidelines offer some insight.
Tesla can only float 2 billion shares without further shareholder approval, and the company currently has 1.03 billion shares outstanding. This math, and the fact that Tesla is seeking shareholder approval, indicate it will likely split shares at a ratio higher than 2-to-1.
Tesla announced its first split in August 2020, and in the ramp-up, the company managed to add 60% to its share price.
Shares in Tesla are up 23% for the month, with the firm adding a staggering roughly $314 billion to its market cap since March 14.