Stocktake: Splits drive investors crazy for Tesla

Crazy share price moves are nothing new when it comes to Tesla. Even by Tesla's standards, however, the price action on Monday last week was bizarre. Shares soared 12.6 per cent, with Tesla gaining more than $50 billion in market capitalisation.

The cause? A 5:1 stock split.

And it's not just Tesla. Apple, the most valuable company on the planet, rose 3.4 per cent on the same day after issuing a 4:1 stock split.

This is bizarre, given that splits are purely cosmetic affairs.

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“A pizza, sliced into six pieces, will not taste better and nor will there be more of it, if it is sliced into 12 pieces”, cautioned valuation expert Prof Aswath Damodaran last week.

“Nothing fundamental has changed in either company”, said Damodaran, adding he was “floored” by the market reaction to splits.

Now, there may be some occasions where splits generate a warranted market reaction. For example, Damodaran refers to “gap events”, occasions where the publicity generated by a split causes investors to notice a lightly-followed, undervalued company. However, no one could argue that Tesla or Apple fall into this category.

The simple reality is pockets of the market have overheated and some investors are doing crazy things. This can be profitable but it’s a risky game – both stocks gave up all their gains in the following days as markets belatedly saw sense.