Have Apple and Tesla made the right move?

The whole world has been watching these two stocks attentively since their IPOs. One company prides itself on its user-centric design while the other is making strides in the world of electricity — both with insane valuations that keep rising every single minute.

Over the last year or so, both Apple’s and Tesla’s share prices have risen considerably due to increasing belief that they will continue to rapidly expand and maybe even become monopolies in their respective ‘future-proof’ sectors. Prior to the stock splits, Apple’s share price was $499.23 and Tesla’s share price was an eye-watering $2212.40. As a result, they needed to take some corporate action to strategically bring the price back down to a ‘reasonable’ level.

So what are stock splits and why do companies undertake them? A stock split is a decision made by a company to increase the number of outstanding shares (i.e. shares that are in the public’s hands) and consequently reduce the price of each individual share. Stock splits are typically expressed in the form of ‘X-for-1’ e.g. 5-for-1 stock split implies that each outstanding share will be split into five individual shares and the new price per share can be found by dividing the original share price by five (this ensures the market capitalisation remains constant).

For example, let’s say you and your friends split a packet of biscuits between yourselves and you ended up with three whole biscuits (i.e. three whole shares). If a 4-for-1 stock split occurred, every single biscuit will be broken into 4 pieces each containing one quarter of the original ‘biscuit value’. Therefore, the original 3 biscuits you had would turn into 12 smaller biscuit pieces but you still own the same amount of ‘total biscuit’.

There are a variety of reasons for why a company would want to undertake a stock split but the notable ones are to:

1. Reduce share price — companies want to try and bring down the price of each outstanding share to make them more attractive to current and new investors (who could previously not afford to buy an individual share)
2. Signal for a positive outlook — companies may be confident in their future growth and would like signal to the market that they want to bring the share price down in anticipation that it will rise back up
3. Increase liquidity — increasing the number of shares and lowering the share price tends to increase overall trading volume and hence the liquidity of the stock

On Monday, Apple, having undergone a 4-for-1 stock split, opened at $127.62 while Tesla, having undergone a 5-for-1 stock split, opened at $444.61. This is a much more affordable price tag and I’m sure investors around the world will be quite keen to get their hands on a couple of these speculative gems.

The million-dollar, or should I say trillion-dollar question is whether this is a cost-effective move long-term. Initially, there will be the usual ‘hype’ and surge in the share price but only time will tell whether both companies, particularly Tesla, will continue to grow at their current astonishing rate and more importantly, whether the public will continue to believe in them. It will also be interesting to observe the effect companies that currently offer fractional shares such as Robinhood and Freetrade have on the number of new investors. As most of these investors are already able to buy however much of a stock they can afford, there is no added benefit from a lower share price.

Although we have to be quite cautious when approaching the tech stock bubble in order to avoid falling victim to herd mentality, there is something irresistible and exciting about owning a part of one of these trendy corporations. Well, until we experience the less thrilling side of a blow-off top.