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Wednesday, September 28, 2022

Tesla split: Why the EV-maker’s stock is cheaper today

Tesla’s stock price was set to drop at the opening bell Thursday, but not because of anything Elon Musk tweeted about demand for electric vehicles, ‘full self-driving’ features, SpaceX updates, silly memes or his legal battle with Twitter.

The electric car company completed a 3-for-1 stock split after the closing bell Wednesday. So one share now costs a third of what it did a day ago. Tesla closed around $891 on Wednesday, which means it was trading a little under US$300 Thursday.

Tesla approved the split in June, its second such split in the past two years. But before you start celebrating about how one Tesla share is now “cheaper,” keep in mind that nothing changes with Tesla’s valuation.

The company is still worth more than $930 billion after the split. Shares continue to trade at a lofty multiple of more than 70 times 2022 earnings forecasts — a huge premium to the valuations of traditional auto companies like Ford, GM, Volkswagen and Toyota.

And the stock is still down about 15% this year, as investors worry about growing competition in the EV market from traditional automakers as well as Musk’s many possible distractions. (SpaceX. The Boring Company. The Twitter takeover soap opera. The list goes on.)

The only thing that the stock split changed is that existing investors now own three times as many shares of Tesla trading at one third of the price they ended at on Wednesday.

That includes Musk, the world’s richest person with a net worth of about $264 billion, according to Forbes. Musk still owns approximately 15% of Tesla’s common stock.

Companies with high share prices often split their stocks to make the cost of one share more affordable for individual investors. The rationale is that some investors might be more inclined to buy a stock if it is trading at a lower price.

Amazon, Shopify, Google owner Alphabet and meme stock GameStop have all done splits in the past few months.

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