It was an unforgettable year for Wall Street and investors, with a benchmark S&P 500 breaking records down and up within a six-month period.
Shares experienced the fastest and steepest bear market decline in history in the first quarter, with the broad-based S&P 500 losing 34% in 33 calendar days. This was followed by a fierce rally, which showed that the index catapulted to a new record in less than five months after reaching the bottom on March 23.
The euphoria of the stock split hit Wall Street
While the performance of stocks with small, medium and even large capital in 2020 has been completely hit, investors in innovative megacap companies such as Apple (NASDAQ: AAPL) and Tesla (NASDAQ: TSLA) have made a bank. As of Wednesday, August 27, Apple’s shares have risen about 70% so far, and electric car maker (EV) Tesla has risen an even more impressive 435%.
What is stunning about these two companies, however, is not that they are superior. Both Apple and Tesla have long been leaders in their respective industries. Rather, it is that much of their profits have so far come after their respective announcements that they will introduce a share split.
Separation of shares allows a publicly traded company to change its share price and number of shares without changing its market value. In Apple’s case, it will accept a 4-for-1 share split. This means that for every share of Apple shares that the investor currently owns, they will hold four times that amount when the split takes effect on August 31st. Conversely, Apple’s share price will fall to a quarter of the current. Whether you own 10 shares at $ 500 or 40 shares at $ 125 (this would be a 4-for-1 division), the value of your holdings and Apple’s market capitalization will remain the same.
Tesla, meanwhile, is introducing a 5 to 1 share distribution. For every Tesla share you own, there will soon be five shares. But at the same time, the share price of Tesla will be reduced to one-fifth of the current one, and the price adjusted for the split will take effect today, August 31. Again, no value was created by dividing the shares.
However, after the announcement of their respective shares, the price of Apple’s shares has risen by 30%, and Tesla’s shares have increased by 63%. As a market value, we are talking about Apple, which is gaining 493 billion dollars, and Tesla’s market capitalization is growing by 161 billion dollars.
Why do investors buy this promotional split hype?
You may be wondering what exactly is the reason for this rapid jump in market capitalization for Apple and Tesla after their announcements of the respective division of shares on July 30 and August 11.
One possible answer is the excitement about accessibility. Although a number of brokers now allow their clients to buy partial shares of shares, not all brokers allow purchases of partial shares. With Apple and Tesla at $ 500 and $ 2239 per share, respectively, this means that an investor with a reserve money of $ 400 cannot buy from Apple, nor can someone with an additional $ 2,000 buy a single share from Tesla. With these respective divisions, effective today (August 31), Apple’s share price will fall to about $ 125 per share, and Tesla will fall to approximately $ 448 per share, according to closing prices on August 27. This makes it much easier for customers whose brokerage services do not allow partial purchases of shares to buy in one or both companies.
It could also be argued that the psychology behind the split is sending Apple and Tesla significantly higher. After all, a company would not make a split if its share price did not increase dramatically. The share split, in which the share price of the company is reduced to make it more accessible to investors, at least on a share basis, suggests that the company making the split is doing quite well (ie growing sales and / or or profits).
It probably doesn’t hurt either that both companies are industry leaders and brands in most households. It’s no secret that investors like to buy from companies they know, and there’s no doubt that Apple and Tesla have some of the most loyal customers in the world.
The euphoria of the division of shares made Apple and Tesla unworthy of new investment dollars
If you’re a longtime shareholder of Apple and / or Tesla, the last few weeks have probably been a lot of fun. But if you’re looking outside and considering buying one of these names, I believe this stock ad officially separates both companies unworthy of your investment dollars.
As for Apple, the company was already becoming highly valued before announcing the split. Today, it is estimated at more than 38 times the projected earnings per share on Wall Street per share for 2021.
Some people would point to Apple’s ongoing transition from being just a product company to one that offers higher margin services. The services offer less unambiguous revenue recognition and have been growing at a steady double-digit pace for some time. The thing is that Apple has generated only 22% of its sales in the last quarter of services. It’s a good idea to evaluate a pure gaming company that reinvests most of its operating cash flow with nearly 40 times the profit, but it doesn’t make sense to do so with a mature business model like Apple. After being valued at between 10 and 20 times his forward earnings for more than a decade, his current forward multiplier makes stocks highly avoided.
The same could be said for Tesla, which has yet to generate year-round profit based on generally accepted accounting principles (GAAP), but has a market capitalization north of $ 400 billion.
Although it cannot be denied that Tesla had advantages for the first time in the EV space or this is the point of its successful mass production, it is not as if Tesla will be able to stick to these advantages in the future. Ford and General Motors they make huge investments in electric cars, and outsiders like it NIO look at the US market. The automotive industry is a capital-intensive, low-margin battlefield where sustained competitive advantages rarely continue. This makes Tesla shares at astronomical prices unworthy of your hard-earned money in their current valuation.