Today is the day! On Monday, before the opening bell, Tesla and Apple both split their stocks. (Tesla 5-for-1; Apple 4-for-1). So how does that affect you as a shareholder and what exactly is a stock split?
Stock splits have been used over time by companies to make shares more accessible to a broader base of investors. When a stock split occurs, keep in mind that the market capitalization of the company is unchanged; a similar comparison is a pizza pie. I have one pizza pie but will split the pie into smaller parts so that I create more pieces to go around. Same goes for stock splits, the shareholder receives more shares but each share has a lower absolute price.
So if you held one common share of Apple stock at $500 at market close on Friday, you are waking up to four times the amount shares in your holdings with a share price of $125, or 25% of the price they were trading at Friday's close (note, the total value of your position remains the same). With Tesla, $473 is the current share price (at the time of publication) reflecting the stocks 5-for-1 split - but again, your total position value is unchanged (outside of today’s price swings of course).
So did you miss out? Some investors argue that purchasing shares pre-or-post-split shouldn’t affect decision making. With Tesla up about 66% and Apple up about 30% since announcing their splits, I would beg to differ - but remember we’re talking about the move in the stock as a result of the mentality with which investors approach splits (or lower priced shares in general), not the attractiveness based on overall company valuations, i.e., not based on the P/E of EV/EBITDA.
In this case, buying shares pre-split would have netted substantial gains, as opposed to now being forced to pay that 66% premium (even if you’re buying a lower priced share). Also brokers have made it easier for investors to buy higher priced stocks, by offering fractional shares. Fractional shares allow you to own a piece of the company at the price you can afford.
To be fair, in the eyes of many, a lower priced stock often becomes more attractive, even if total company valuation remains completely unchanged. This tends to result in increased demand for the stock and potentially (as we’re seeing today with the shares of AAPL and TSLA) cause some stocks to jump post split and actually increase market capitalization (therefore raising the total company valuation).
So should I buy now? The Jim Cramer and the Action alerts plus team recently updated the price target of Apple to $135, “reflecting roughly 32.5x consensus estimated fiscal 2022 GAAP earnings per share.”
Both Tesla shares and Apple shares are up today about 2% at the time of publication.
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Disclosure: At the time of publication, I am long Tesla and Apple. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for creating this article (other than from TheStreet) and have no business relationship with any company whose stock is mentioned in this article.