Tesla stock split overpowers China shutdown, stock pops

For a second time in less than two years, Tesla (TSLA) is seeking to split its stock - and shares are jumping. In a tweet earlier Monday, Tesla confirmed it was asking shareholders for permission to split the stock:

Essentially shareholders would receive a special dividend of additional shares per share that they already own.

In August 2020, when Tesla announced its first stock split, it was a 5 for 1 offering. It is unclear yet what type of split would be proposed for shareholders at this time. Tesla’s annual meeting is usually in June.

At the time of Tesla’s previous stock split announcement, shares were trading around the $1,300 level. Once the stock split was announced, shares were pushing to $2,000, giving the company a market cap of over $400 billion.

Since then Tesla shares have been on a rocket ship higher, soaring to over $1,000 post-split and with the company yet again reclaiming its $1 trillion market cap after an early 2022 hiccup.

Analyst Dan Ives at Wedbush Securities has given his blessing for the new split proposal. “We view Tesla's move following the likes of Amazon, Google, Apple and initiating its second stock split in two years as a smart strategic move that will be a positive catalyst for shares going forward,” he wrote.

Theoretically speaking a stock split should not move shares higher pre-split because the value of the company hasn’t changed. But various theories abound for why a split could boost values of the stock. For one, if the shares are cheaper, more retail investors are able to buy and own shares of the stock, increasing the base of ownership.

Another theory is that when a stock splits, such as for a popular company like Tesla, it is more easily added to various indexes like the S&P 500 or Nasdaq 100, which then will lead to more shares being purchased by fund managers that model their portfolios against these indexes. Another theory is cheaper share prices allow for cheaper options pricing for the booming derivatives market, where retail traders and the Wall Street Bets community actively operate.

More COVID-19 shutdowns in China

However, all is not well for Tesla, as ongoing COVID-19 flare-up in Shanghai have reportedly led to another factory shutdown of Tesla’s Gigafactory there.

Bloomberg is reporting Tesla is shutting production at its Shanghai factory for four days as the city is preparing to lock down in two stages to carry out mass testing for COVID 19, citing sources.

The report goes on to say that Giga Shanghai is located in the part of the city which is part of stage 1 of the lockdown process, meaning it will be shut down from now until Friday. The first shutdown that affected the Shanghai factory lasted two days.

It is unclear how much production will be impacted and how soon Tesla can ramp up production once the factory is given an all-clear. Assuming a one-week shutdown, with a week to restart production and get assembly lines back up to speed, it’s possible the factory may lose around 17,300 units of production, given Giga Shanghai’s theoretical output of 450K vehicles a year. This assumes the factory was running at full capacity at this time.

Nevertheless, the news of another stock split is overshadowing the Shanghai shutdown, with Tesla shares up 5% in early trading.

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Pras Subramanian is the senior autos reporter for Yahoo Finance. You can follow him on Twitter and on Instagram.

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