over 3 years ago • 3 mins
Tech giant Apple and electric carmaker Tesla’s stocks have enjoyed the sweet smell of success since they announced their respective stock splits, so we looked into what it is about them that’s whetting investors’ appetites.
A stock – or share – split is exactly what it sounds like: a company splits each of its existing shares into a greater number of shares that are, collectively, worth the same amount. So in Tesla’s case, one share – worth around $2,000 – will be replaced by five shares worth $400 apiece, all else equal. Apple’s, meanwhile, will go from around $500 to $125 after its four-for-one split.
A share split can make a stock much more attractive to investors even though it doesn’t actually change a company’s fundamental valuation metrics – i.e. what it’s worth relative to its earnings potential. That’s because a lower headline price might encourage investors to buy into a company they mightn’t have bought into otherwise. Apple, for example, has seen its share price rocket since it split its stock seven to one in 2014. In fact, the increased accessibility might be why investors buy up the company’s shares before the split even takes place, pushing its stock higher – which is exactly what’s happened here.
Split shares might not actually affect you too much: some online brokerages already let you buy fractions of shares, which also provide partial dividends. But seeing as fractional shares don’t offer the rest of the rights that come with complete shares – like participation in annual meetings and votes on company policies – they’re a dealbreaker for “institutional” investors. The price of a company’s shares can be too: while they might have billions to invest, institutional investors still have to decide where to “allocate capital” based on share prices.
If you have a single orange and cut it into four segments, you still only have one orange. Apple and Tesla, likewise, haven’t created more value (or, er, oranges) since their split: they’ve just repackaged the value they already offered. And that’s left some analysts and investors baffled by their share price rises since their announcements. Nothing’s fundamentally changed, so both stocks’ valuations are now looking pretty stretched.
US stocks hit fresh record highs this month, which might have something to do with Apple’s valuation hitting $2 trillion for the first time. Some traders might argue its valuation is unlikely to fall below that mark, and that this will create a “resistance level” in Apple’s share price. And that psychological safety net, in turn, might’ve emboldened other investors to buy its shares. Tesla played its part too: its upcoming inclusion in the key US stock market index – the S&P 500 – might’ve convinced investors to ditch rivals like Nio and Nikola and spend that cash on the big daddy of electric vehicles.
Last week, the US Federal Reserve said it’d allow inflation – the rate at which prices of goods increase – to rise beyond its 2% target for a while, as long as it hits that target on average over time. That suggests US interest rates are going to be a lot lower for a lot longer than most people thought...
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