Investors are hungry for any sort of good news after Wall Street's brutal start to 2022. Inflation is high, consumer sentiment has cratered, and the market is swooning. Few events capture traders' attention like a blockbuster stock split. And while a stock split has no direct effect on the underlying value of a company, the ancillary effects of those moves can be pretty poignant.
If there's one stock that could use a positive catalyst, it's Tesla (TSLA -1.92%). The automaker's annual investor meeting will take place in early August, at which time the shareholders will likely vote to authorize an increase in the share count. That would pave the way for a stock split.
Retail investors are a critical market
Tesla's revenue and profits have grown massively over the past decade. In 2012, the company posted less than $1 billion in sales. Fast-forward to 2021, and Tesla reported $53.8 billion in total revenue. In recognition of that, investors have rewarded it with a market cap that's larger than the next seven largest automakers combined.
Data source: YCharts. Chart by author.
Part of that value is based on the expectation that Tesla will maintain its dominance in the mushrooming electric vehicle market, but the stock is also buoyed by a dedicated following of retail investors. According to Business Insider, Tesla was the eighth-most purchased stock by retail investors in 2021, with $2.74 billion in net purchases that year. Tesla is consistently among the most popular stocks discussed in amateur investor forums on social media. As such, it is in the company's interest to keep its shares affordable to small investors.
The stock also trades at far richer valuation ratios than other automakers even now. A stock split won't change that fact, but it could create the perception of a cheaper stock.
Source: Getty Images.
Options for investors
Lowering the stock price paves the way for a stock to be more active in the options market. Option contracts are purchased in sets of 100, so a $700 stock would require a ton of capital for a single trade. By lowering the price, this market becomes available to the average investors.
Selling covered call options is one way to generate income through options. This is a popular move since it can generate cash from a stock that does not currently pay a dividend and is unlikely to do so soon. More adventurous investors could also use put options to generate cash or hedge against a sudden downturn.
While options have benefits, they are also quite risky and should only be used by seasoned investors.
Tesla needs a positive spark
Musk always sparks a tremendous amount of headlines, and the coverage hasn't been positive lately. His high-profile bid to privatize Twitter (TWTR) has become a spectacle. The inner workings of the deal and the debate over the number of "bots," or fake accounts, on Twitter has been very public. There is speculation that Musk is attempting to negotiate a lower price or seek an excuse to nix the deal.
This has led Tesla investors to wonder whether Musk's divided attention will negatively affect the automaker. In the weeks since April 14, when his Twitter buyout deal was agreed to, Tesla's stock price has cratered.
Standard & Poor's also removed Tesla from its S&P 500 ESG Index during its reallocation in early May. While it might seem a bit odd that a major electric vehicle maker would be dropped from that index, the decision was, according to Standard & Poor's, based on social and governance factors as well as environmental ones. And while that move was hardly a blip on most investors' radars, Musk felt the need to aggressively respond via Twitter, which quickly made the story much more significant. His use of aggressive language may have been applauded by some of his fans, but it also may have left other investors concerned about the lack of professionalism.
With all of this drama surrounding Tesla and its CEO, August's shareholder meeting and the possibility that it will be followed by a stock split could provide a reprieve for the company and shareholders. The stock needs a catalyst to counter the negative momentum. But even with the stock split likely in the works, investors should exercise immense caution toward Tesla due to its vast market cap, uninspired leadership, and downward momentum.
