Many investors are excitedly talking about the looming potential stock split of a certain high-profile electric vehicle maker. At least a little of this discussion is centered on whether the split, in and of itself, will push up the price of said stock.
As any seasoned investor knows, past performance is no indication of future results. But at times, we can glean insights about investor behavior in the wake of certain corporate events. Perhaps a high-profile stock split of just a few years ago can give us some clues about the big upcoming one.
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That's one expensive fruit
The recent-vintage split I'm talking about is Apple (AAPL -1.62%). In the years following the groundbreaking 2007 introduction of the iPhone, the company's appeal both as a consumer device maker and a stock went through the roof. From that time to the trading day before its 4-for-1 stock split (Aug. 21, 2020), Apple's shares rose at a dizzying rate.
The 2020 split, by the way, wasn't Apple's first. The company has cleaved its stock five times since going public (in addition to the 2020 split, it did so in 1987, 2000, 2005, and 2014). But even with the big 2014 split, which created seven shares for every one, the company's rock star-level popularity pushed the stock price well into the triple-digit club at around $500 apiece.
It's important to emphasize here that stock splits do not, in and of themselves, change the market capitalization of the splitting party. Rather, the existing share pile is merely divided into smaller pieces of the whole. So, in Apple's example, say the pre-split level was a nice, even $500. After the split, investors would have owned four shares worth $125 apiece. At the end of the day, it's a simple math operation that creates no additional capital for the company doing it.
That said, nearly everything notable that happens with a high-profile stock impacts its price. Of course, we have no way of teasing out whether a certain percentage of Apple investors after that hot August day in 2020 bought into the company largely or exclusively because of the split.
There must have been more than a few, though, as trading volume in the company -- which didn't report any other major news of investor consequence -- reached levels not seen since late February and early March of that year (when the company reduced its revenue guidance for the upcoming quarter and many traded out of the shares). And since the split was effected, Apple's shares have gained over 40%.
But let's zoom in to that immediate after-stock period. Perhaps tellingly, Apple's shares slumped in that sleepy stretch from mid-August to early September, broadly matching the pattern of the S&P 500 index. This suggests that however many people were compelled to become Apple stockholders because of the split, they had little effect on its subsequent price trajectory.
Accelerating share price growth?
This is good to keep in mind when thinking about the apparently looming split of the aforementioned electric vehicle company. We're talking, of course, about that bellwether sector play that inspires Apple-ish levels of devotion from customers and investors alike, Tesla (TSLA 0.23%).
In a recent regulatory filing, Tesla -- again like Apple, a company that has divided its shares previously -- said it is aiming "for an increase in the number of authorized shares of common stock... in order to enable a stock split of the Company's common stock in the form of a stock dividend." (A "stock dividend" in this case would effectively be the same thing as a split.) It will put this to a shareholder vote at the company's annual general meeting, which hasn't yet been scheduled.
Tesla shares experienced a bump in both volume and price, which rose by 8%, the day the announcement was made. Judging by Tuesday's unmemorable performance and a dip in that volume, though, that seems to have been a one-off simply on the basis of more people talking about Tesla stock.
Ultimately, as much as the world loves Tesla, in the likely case that the company wins the share split vote, I wouldn't expect a dramatic rise in the price on that event alone. Like Apple, investors would be wiser to watch for fundamental developments in the company's business and buy, sell, or hold accordingly.
