The Value in Tech Stock Splits
This year has belonged to tech stocks. Even amidst a once-in-a-century pandemic and the resulting economic fallout that continues to wreak havoc across many industries, tech stocks have managed to actually perform quite well. Specifically, Tesla Inc (NASDAQ:TSLA) and Apple Inc. (NASDAQ:AAPL) are two tech stocks that have seen huge growth in 2020. Both Tesla stock and Apple stock, coincidentally, just underwent a stock split. So, what does that mean for investors and how can they profit?
There are a number of reasons why a company may engage in a stock split, with the main one being to increase liquidity. But in the case of Tesla stock certainly, and to a lesser degree Apple stock, a stock split made a lot of sense; the share prices were simply too high.
Now, when a share undergoes a stock split, this doesn’t actually affect the value of a company on its surface. For instance, one Tesla stock trading at $2,500 being reduced to five shares at $500.00 doesn’t do anything to the value of the company other than divvying it up into smaller parts.
With practices like fractional trading offered by most brokers, the argument could be made that stock splits aren’t all that necessary anymore.
But that is forgetting an important aspect of the market: the psychological aspect.
Remember that economics is not as hard and fast a science as we like to believe, and that the unpredictable and not always logical psychology of people plays a huge part in how the market operates.
In this case, we have share prices that were formerly very high (in the thousands for TSLA stock and at about $400.00 for AAPL stock) that have now been reduced to a much more reasonable (at first blush) number.
Buying a quarter of a $2,000 stock and buying a single $500.00 stock both mean the same thing, just like owning a single $2,000 stock and seeing 10% returns would net the same value as owning four $500.00 stocks and seeing 10% returns.
But there is a not-entirely logical part of the human brain at play here that prefers larger numbers. More shares. More ownership. After all, wouldn’t you rather own five stocks of a company instead of one? Of course you would. It just sounds better. Forget that during a stock split, it doesn’t actually mean value has been lost or gained; it just appeals to our most basic way of thinking: larger numbers are better.
So, with that caveman brain at play, we can understand how the AAPL stock split and TSLA stock split sent shares flying.
Chart courtesy of StockCharts.com
The moves by both companies were shrewd indeed, helping to spur growth in each stock, respectively.
But that growth has since sputtered somewhat in the afterglow of the rise. Does that mean that AAPL stock and TSLA stock are set for a correction? I doubt it.
Tesla Stock and Apple Stock in 2020
Both TSLA stock and AAPL stock have, as I mentioned earlier, seen huge growth in 2020, growth made all the more impressive considering the economic conditions.
These are both companies that I have been bullish on for years now, with long-time readers and investors possibly benefiting greatly from said advice.
Tesla stock alone has surged 800% on the year; I’ve been very bullish on TSLA stock since I first began writing with Profit Confidential back in 2016.
Overall, these are two tech stocks poised for huge gains for years to come, potentially even decades. TSLA stock specifically is hoping to follow up its huge year with another big win as it delivers on solar-powered home batteries.
Apple, meanwhile, is looking to win big off the switch to 5G in the near future.
Wall Street analysts have been bullish on Apple stock as well, with many raising their pricing targets lately as the company continues to mark record highs. (Source: “Apple Stock Is Soaring Ahead of Its Stock Split. That’s Not Why Its Future is Bright.” Barron’s, August 25, 2020.)
But for all that goodwill, we recently saw a slight dip in both TSLA and AAPL. The reasoning is simple enough: a correction for the massive gains the companies earned as a result of their stock split announcements, despite the move being ultimately a neutral one.
This pullback was to be expected, and may actually be a good opportunity for investors who felt they missed out on these companies earlier in the year.
While this downturn in both AAPL stock and TSLA stock may be sustained for a few days or weeks, maybe more, ultimately both these companies will get back to their winning ways before long.
In fact, while I anticipate an eventual Tesla stock correction due to its rapid advance in 2020, I also fully expect the company to bounce back quickly with even more gains moving forward, based on its future projections in both the electric vehicle market and renewable energy market more broadly.
Apple stock, conversely, is likely to face only a small market backlash from its split and will be back to gains in short order.
In both situations, buying on a dip could be a very profitable move for investors looking for both long- and short-term investments.
Buying on the smaller dip now or waiting out a Tesla stock correction are both viable strategies to try and maximize profit in the shortest time period, if also the riskiest. On the other hand, buying and holding now will also likely net big rewards. It’s also a simpler strategy, with both options being viable depending on how risk-averse you are.
Tech stocks like TSLA and AAPL have dominated in 2020, and they show no signs of slowing down in any meaningful way.
While both companies are about to face a small correction on the market following the spike in value that preceded their stock splits, ultimately investors will likely be pleased holding Tesla stock and/or Apple stock in their portfolio moving forward, as both promise to see big gains in 2020 and beyond.
Having said that, both stocks offer opportunities to make riskier plays or hold for the long-term, making them perfect additions to almost any portfolio no matter the overall strategy.