Christmas came early for investors this year as Apple (NASDAQ: $AAPL) and Tesla (NASDAQ: $TSLA) are performing stock splits at the end of August.
Apple is trading at $450 and is executing a 4-1 split on August 28th.
Tesla is trading at $1.887 and will be splitting their stock at a 5-1 ratio on August 31.
For those unfamiliar about what exactly a stock split is this should clear the air.
When a company’s stock price is overvalued and too pricey for the average investor the company usually will issue the news that they will be splitting their stock in the near future.
When the split is executed the stock price will divide by the ratio the company chose and investors shares will multiply by that same ratio.
If Apple was to perform their split today, investors holding one share of Apple stock would now own four shares but the price would be reduced to $112.50 per share.
Investors will therefore still have the same equity value as they did before the split, but they now simply have more shares.
This is Apple’s fifth stock split since their IPO back in 1980. Their previous split dates were 2014, 2005, 2000, and 1987. Their most recent and largest split, at a ratio of 7-1, occurred because the stock hit all time highs of over $700 per share.
The price was then knocked down to ≈ $100 per share.
With Apple trading at $450 currently, investors who owned the stock during the latest split and held it until now would have accumulated a gain of well over 400%.
An investment of $100,000 in 2014 would be worth close to half a million dollars today.
This shows why splits are a powerful tool to keep the interest of and accessibility to investors – particularly retail investors.
This does not mean splits always generated profits for shareholders. There have been few cases where stock splits hurt investors portfolios.
While it is rare stock splits can go bad sometimes as there is risk associated with every investment.
On the other hand, splits have an evil twin called reverse splits.
These are the direct opposite of regular splits. They multiply the price of the stock by a ratio and divide the number of shares outstanding by that same ratio.
Therefore, you now have less stocks in your portfolio that are overvalued.
Companies perform reverse splits when their stock price has been on decline for a long period of time and the stock price gets too low.
Now does this mean that reverse splits are always bad? The short answer is no.
Just like regular splits can be bad, reverse splits can be good.
Reverse splits typically work better for newer companies. If you are eager to invest in a stock that is about to reverse split you should take a look at the age of the organization.
Most investors would agree to stay away from reverse splits in most scenarios.
This move is particularly seen if a company is looking to stay listed on a major exchange, like the NYSE, thus avoiding slipping under the threshold.
Or by a small cap company from OTC Markets looking to uplist to a senior OTC exchange or really go big and uplist to NASDAQ, NYSE, LSE, or any other major exchange.
Tesla stock split history is, contrary to Apple, blank. This will be their first split since the IPO in 2010.
The company’s recent success has skyrocketed Tesla stock to over $1500 per share and primed the company for its first split. Tesla will be splitting at a ratio of 5-1 setting its $1500 stock down to roughly $300 per share.
Its price climbed 14% on the news of the split and investors can expect it to keep rising until its split on August 31 2020. This quick jump in price shows how stock splits can stimulate induced demand.
Let’s compare the possible outcomes of both the Tesla and Apple split.
Tesla is a fairly new company and is still working out kinks of their operations. They have been having battery problems as well as production issues.
One malfunctioning battery that explodes in a civilian vehicle will be a hard blow for Tesla and the stock price could tank. The probability of this is unknown, it’s most unlikely – but it’s plausible.
Apple has been around for decades and is one of the most successful and popular companies in the world. Their ideas and technology have been the benchmark for companies around the world.
Analysing the underlying fundamentals of the two stock-splitting-companies it is safe to conclude that Apple’s split will have much less risk associated than Tesla’s will.
Apple’s growth is a lot more predictable than Tesla’s is – making it a less volatile investment. In other words, it has the potential of providing lower returns but also smaller losses – and vice versa for Tesla.
Should an investor only want to pick one of the two to invest in it would largely depend on their risk appetite and ideological conviction. Tesla’s stock has achieved a cult-like-status among retail investors, decoupling it from current fundamentals in favour for the vastly risky future potential.
Our advice is stick with Apple.
In this erratic market we want to deal with as little uncertainty as possible.