What happened
Shares of electric-car maker Tesla (NASDAQ:TSLA) soared 74.2% in August, according to data provided by S&P Global Market Intelligence. On the last day of the month, Tesla’s stock split five for one.
Tesla’s shares closed out the month at $498.32 per split-adjusted share. Pre-split, that would have been a share price of $2.491.60. On July 31, its shares closed at “just” $1,430.75. This continued Tesla’s 2020 winning streak: The company’s stock price appreciated nearly 500% between Jan. 1 and Aug. 31.
Image source: Getty Images.
So what
August brought a mixed bag of news for Tesla the company. On the one hand, it was reported that Panasonic was increasing its investment in Tesla’s Gigafactory 1 by $100 million. On the other hand, the company also encountered some setbacks in China.
But who am I kidding? Tesla’s incredible share price jump was due almost entirely to its decision to split its stock. All of the stock’s gains occurred between the company’s Aug. 11 announcement that it would split its shares five for one, and its first day of post-split trading, Aug. 31.
A stock split doesn’t affect the value of individual investors’ holdings, and with many brokers offering fractional shares, a high share price isn’t the barrier to ownership that it once was. Still, many investors balk at plunking down four figures for a single share, so Tesla’s decision was seen as likely to entice a lot of new investment.
That may have been a self-fulfilling prophecy: Expecting a huge windfall on Aug. 31, investors began piling into the stock. That drove the price higher, which prompted more interest driven by fear of missing out. It all culminated in the first post-split day itself, when a record 118.4 million shares changed hands (about double Tesla’s previous volume record, set in February).
Now what
Now investors are taking their profits: Tesla’s shares are down nearly 20% so far in September. It’s not really surprising. Investors bought the carmaker‘s stock at ridiculously high valuations expecting a big payday on Aug. 31. Once those bets paid off, all that was left was that ridiculously high valuation. Now that the stock price has started dropping, short-term investors are getting out to protect their gains.
Honestly, now’s probably a decent time to take some profits from Tesla. Even with recent drops in share price, the stock is still up more than 350% year to date, and more than 700% over the last five years. Tesla’s price is so divorced from any traditional valuation metrics that it’s impossible to know where it’s likely to end up in a month, let alone a year or two.
But nothing fundamental has changed about the company itself or its operations, so investors shouldn’t feel the need to follow the crowd to the exits if they’re still bullish on the stock.