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Tesla Files for a 3-for-1 Stock Split. Will It Fuel a Bounce?

Electric vehicle manufacturer Tesla (NASDAQ: TSLA) could soon be joining the 2022 stock-split club that already includes Amazon, Alphabet, and Shopify. Paperwork filed with the Securities and Exchange Commission (SEC) late Friday reads that the company intends to increase its total number of authorized shares in order to “facilitate a 3-for-1 split of our common stock in the form of a stock dividend.”

This may result in a much-needed rebound effort from the stock. Shares are down more than 40% from their November highs, leading weakness being mirrored by many technology names, including the aforementioned Amazon and Alphabet. Both stocks perked up in response to announcements that splits were forthcoming. And, at least for Amazon, the split appears to have provided something of a bullish bump, even if it was ultimately unwound by the market’s bigger bearish tide in the meantime.

It’s also possible investors have already figured out that stock splits don’t actually make a company more profitable. They just divvy up value using a different baseline share count.

On the agenda

The split isn’t set in stone, for the record. Tesla’s board of directors is simply requesting that shareholders authorize the issuance of another four million shares, up from the current cap of two million, only 1.04 million of which are currently outstanding. The matter will be put to a vote at the company’s 2022 shareholder meeting scheduled for Aug. 4.

Given the market environment and CEO Elon Musk‘s success leading the electric vehicle company to sustained profitability, however, it’s unlikely investors will reject the request that could ultimately work in their favor. As the official SEC filing explains, since “retail investors have expressed a high level of interest in investing in our stock, we believe the stock split will also make our common stock more accessible to our retail shareholders.”

The filing adds: “Our success depends on attracting and retaining excellent talent, not only through providing a respectful, safe, inclusive and equitable workplace, but also through offering outstanding benefits and highly competitive compensation packages.” These packages include equity-based awards.

The upcoming shareholder meeting will also facilitate votes on two board members, although that’s not the biggest news regarding the company’s board. Rather, the impending exit of board member Larry Ellison — Oracle‘s co-founder and Chief Technology Officer — will be used by Tesla as an opportunity to reduce its current board of eight directors to only seven. Simultaneously, the company is asking investors to decrease its directors’ terms from three years to two years.

Anti-harassment, collective bargaining, and reporting on lobbying efforts are also on the agenda for Tesla’s Aug. 4 shareholder meeting. The stock issuance approval required for the planned 3-for-1 split, however, is clearly the centerpiece of the decisions to be made that day.

Higher highs ahead?

Stock splits have been well-received by shareholders, historically speaking. They’re usually done in response to rising stock prices, and although they’re only the equivalent to exchanging a one-dollar bill for a dollar’s worth of change, investors tend to view these reconfigurations through a bullish lens. It’s not a stretch to believe a company’s underlying success that drove a stock’s price higher in the past will continue doing so in the future.

Be wary of assuming post-split gains are a foregone conclusion, however. This bullishness is just as often attributable to the market environment as it is to the split itself. And they’re often only seen from stocks of companies that depend on a strong economic environment while in a strong economic environment.

To this end, although Tesla is the primary pioneer of electric vehicles and a solid company in its own right, just a little over a week ago Musk himself warned employees that about 10% of them would be let go in the foreseeable future because he’s got a “super bad feeling” about the economy. Friday’s reported multi-decade-high consumer inflation rate of 8.6% for May suggests Musk’s worry may well be on target.

In this light, stepping into Tesla shares only because a stock split is in the offing isn’t a move most investors need to bother making. Indeed, given the current, mostly bearish environment, such a move leans toward being an outright bad idea.

That’s not to say Tesla shares are doomed, because they aren’t. Electric vehicles are the future to be sure. The U.S. Energy Information Administration estimates the number of EVs traveling the world’s roads will swell from around 10 million now to more than 670 million by 2050. A huge number of them are sure to be Teslas. If you’re thinking in this 30-year timeframe — or even just a 10-year timeframe — Tesla’s a great long-term holding.

Of course, if that’s your mental timeframe, the upcoming 3-for-1 split also has no meaningful bearing on your prospective long-term gains.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. James Brumley has positions in Alphabet (A shares). The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Shopify, and Tesla. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.

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