Huge Misconception: Stock Splits Do Not Add Value

Fundamental analysis will tell you that a company with a share price of $100 splitting their stock 10 to 1 to bring the price of the share down to $10 does not change the company’s value (market cap).  Without considering any other dynamics of this move, this is true.  This is where technical analysis comes in, which by nature is the study of supply and demand.

Over the past decade the investment landscape has completely changed.  The race to zero commissions has lowered the barrier of entry.  Just as an example, Robinhood, the popular stock trading app that was a key player in the race to zero now has nearly $100 billion in assets under custody.  The average size of a Robinhood account is $5,000, yet the median is only $240.  This means that if your stock is valued above $240, half of the users of Robinhood cannot buy your stock. 

Tesla is a prime example of this.  A company whose founder is popular with the millennial crowd, many of which are more apt to use a service such as Robinhood and only have a small amount to invest with.  If the price of the stock is too high, the barrier of entry for a new investor is too high and they cannot purchase this stock.  By splitting the stock as Tesla did August 31st 2020 at a 5:1 rate, bringing the share price down from about $2,500 to around $500, the barrier of entry was lowered, which automatically creates demand that was not there before.

Tesla plans on another stock split this year.  This split will once again lower the barrier of entry, allowing newbie investors to buy Tesla stock.  This natural demand increase may once again push Tesla upwards.  There is also something to be said about appealing to a younger, more social generation who will post about their wins and be more convincing amongst their peers than the older generation.

The fundamentals of Tesla have been debated on a daily basis across the financial world.  Bulls argue about their future growth, fundamentalists argue about their insane market cap compared to their earnings.  But what if both of these groups were missing the target.  What if Elon Musk simply found a way to monetize a generation through a stock? 

Image from Business Insider - Tesla and Twitter lead the 10 most talked about stocks on Reddit's WallStreetBets forum – April 5, 2022

Related: All You Need to Know About the Stock Split of Amazon, Tesla, and Alphabet