TSLA and AAPL- The Strategic Stock Splits
The Market Dominance of Tech
The NASDAQ big tech seems to have come out of the pandemic unscathed. Revenue growth marginally declined or grew at a sluggish rate for Apple and Tesla for specific quarters. However, future predictions and the market outlook seem to be optimistic on the digital push.
The dominance of tech can be amplified through the divergence of YTD graphs of NASDAQ and S&P 500. With the big tech (Apple, Microsoft, Amazon, Google, Facebook, and for this blog Tesla too) being responsible for 34% of NASDAQ’s’s total market cap, NASDAQ’s extra 18% YTD return is simple to elucidate.
YTD Apple (NASDAQ: AAPL) has increased its market cap by 50%, whereas Tesla’s (NASDAQ: TSLA) market cap has nearly quadrupled. Whether this sudden surge is justified or not is the topic for another blog, but it is imperative to understand the driving forces behind this rally as it yields to the reasoning behind their stock splits.
The Sudden Surge in Stock Prices
Firstly, Tesla and Apple have undoubtedly performed well during the pandemic. Both companies have been successful in sustaining if not increasing revenues. In a global pandemic, with declining consumer demand, restriction on business activity, and broken supply chains that statistic speaks volumes.
Secondly, the stock markets have generally been bullish after the March lows. An overall positive sentiment and the speculation of a speedy recovery of business post COVID seem to form the basis on which the markets have been surfing lately.
However, there might be another profound reason behind these shares skyrocketing, a reason that seems to have been overlooked. This is the hypothesis I’m proposing.
During the pandemic, a greater access to financial assets through zero brokerage online trading apps like Robinhood incentivised the general public to invest in the stock markets. A plethora of new beginner investors flooded the markets. And by “a plethora” I mean millions of new investors, with Robinhood alone clocking in more than 3 million new traders.
These new, mostly young investors, with relatively low knowledge about the markets are more likely to invest in stocks of companies they are aware of or companies that are active in the news. Apple and Tesla being one of the top contenders for this spot.
Now I know what the counter-argument is going to be, “retail alone cannot drive markets”, however, we’ve witnessed the power of new traders when Robinhood users single singlehandedly skyrocketed Hertz share by almost 900% and that too within 2 weeks.
So there might be a chance that apart from financials, the growth of these two stocks, and overall the big tech, might be simply attributed to an increased proportion of new and inexperienced investors. A terribly simple, yet compelling hypothesis.
A simple statistic from Robinhood itself strengthens this theory, be it weekly or monthly highest traded stocks, TSLA and AAPL always seem to be high up on the charts. Thus, it can be reasonably concluded that Robinhood users, representing new and younger traders have a general liking for TSLA, AAPL, and general tech stocks, driving up their demand, and subsequently stock prices.
While I’m not outrightly saying that the markets are surging only because millennials have moved from Snapchat over to Robinhood. Alternatively, what I propose is that this sudden spike in new traders is very likely to have influenced the shares in question.
The Smart Stock Split
Now, Tesla and Apple after all the havoc they’ve wreaked recently, are trading at $1650 and $459 respectively as of August 15, 2020. These now seem to be steep prices, considering the average portfolio of traders at Robinhood and other beginner trading platforms is around $1000 to $5000. A year earlier these stocks were considerably affordable, which each of them trading at around $200. At these prices, there’s a general decline in preference for AAPL and TSLA.
What does a company do when it wants to make its stock more affordable? It splits them. A stock split essentially divides a company’s existing stock price by a constant and multiplies the number of shares by the same constant. Taking an example, if the firm X had to do a 2:1 stock split on its share of $100, it would produce 2 shares of $50 each. For the people invested in these shares, a stock split doesn’t make a difference. But for the majority of the market a split makes the stock more attractive due to its lower share price, thus increasing a share’s liquidity and affordability.
Apple’s Board of Directors agreed to a 4:1 stock split and eager to capitalise on the same concept, Tesla subsequently announced a 5:1 stock split. This would ultimately take AAPL to around a range of $112 and TSLA to a range of $330, tucked within the reach of new investors.
To any decently experienced investor, it’s obvious that the $330 TSLA would be a smaller piece of the cake (one-fifth of the existing stock) when compared to the existing $1650 TSLA. However, for relatively new investors that probably won’t matter, all they would see is that a company they “like” or that’s in the news and part of the “hype” is within their reach. This stock split would essentially act as a restart button for the market concerned with new investors.
These splits would further drive demand, rapidly increasing the market capitalisation of Tesla and Apple. And honestly, which company would shy away from such an opportunity.
Following the steps of Tesla and Apple, other companies might be incentivised to hop on the same bandwagon to split stock, and harness the most out of the current bullish market trend, potentially driving markets even higher, that too during a pandemic.
Concerns
However, the question that arises is that, with global economies in shreds, are financial markets representing a justified outlook of the underlying assets? Or is this again a case of “irrational exuberance” as stated by Ex Fed Chairman, Alan Greenspan, foreseeing the Dotcom crash of the early 2000s. Well, with all the preposterous stuff that’s already happened in 2020, another market crash is, well, plausible. On the positive side, however, let’s just hope that economies and businesses soon recover and live up to market expectations, justifying the hefty price tags the securities boast.