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My PCs found a large cloak of elvenkind. Can a medium person use it, and does it still offer the +5 bonus for stealth? Or can they even cut it into two pieces and use it on two characters? A RAW response would be great, but not-RAW within reason and making sense is also ok.

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Magic items, aside from armor and weapons, doesn’t really even have a size, and just generally works for everyone, per Size and Magic Items:

When an article of magic clothing or jewelry is discovered, most of the time size shouldn't be an issue. Many magic garments are made to be easily adjustable, or they adjust themselves magically to the wearer. Size should not keep characters of various kinds from using magic items.

There may be rare exceptions, especially with race-specific items.

Note that by “race-specific” they mean items that can only be used by a certain race; the cloak of elvenkind is so-called because elves are famous for making it, not because only elves can use it.

So the cloak of elvenkind should just fit whoever wants to use it, even a Small character. No cutting it in half to make two; that would just result in a destroyed and useless ex-cloak.

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