Is Tesla’s Stock Split Good For Investors?

Tesla Stock

Following the release of Q2 earnings, I revised my price objective for Tesla (NASDAQ:TSLA) shares to $765 pre-split, representing a 14% drop from the current price. As I’ve mentioned in previous articles (1, 2), the primary assumption in my model is that Tesla will expand at a 25% CAGR over the next decade, mainly owing to increases in electric car sales. While the imminent Tesla stock split isn’t relevant to my thesis, investors may have concerns about how it works. I’ll try to explain some of the most popular ones in this piece.

Stock Split FAQs

I discussed Tesla’s stock split in my last piece, but I’ll summarize some of the major questions and answers surrounding the split here. Those who have read my prior essay or are familiar with stock splits can go to the next part.

What Effect Does Stock Splits Have on Your Investment?

Because stock splits do not affect a company’s market cap, the overall value of your investment is unaffected. The fall in share price is countered by an increase in the number of shares owned.

Assuming Tesla is valued at $900 before the split, you own one share. After the split, you’ll have three shares, but each will be worth $300. You have $900 in either case. Of course, the value of Tesla shares fluctuates as the market rises and falls daily, but this occurs whether or not a split is taking place.

It’s also worth mentioning that following the split, the price per share and price per options contract will be reduced, making non-fractional shares and options more accessible to small investors.

What Happens If You Buy Tesla Before The Split?

Purchasing Tesla shares before the split is no different than purchasing them after the split or on any other day. To maintain the same total investment, you would acquire three times as many shares before the split as you would after.

When Will Tesla’s Stock Divide?

On Wednesday, August 24, after the market closes, you will get two more shares of Tesla stock for each share you already possess. Beginning Thursday, August 25, shares will trade at their post-split price.

How Many Times Has Tesla Stock Split?

Tesla will divide its shares for the second time. Tesla previously announced a stock split of 5-for-1 on August 31, 2020. Since then, the stock has increased by more than 100%.

Is Tesla’s Stock Split Beneficial to Investors?

To put it another way, do stock splits affect performance? This is undoubtedly the most important question for most investors and the most difficult to answer.

There is evidence that corporations that split their shares outperform in the near run, maybe because splitting permits some equities to be included in indexes like the Dow and makes them more accessible to individual investors. Looking at individual stocks, however, there are several instances where a company decreases around the time of its split. As a result, I would not advise relying on a single stock’s short-term price rise due to its split.

Splits, on the other hand, aren’t necessarily bad news. They generally occur after a company has climbed significantly, as Tesla stock recently did. Winners tend to keep winning. Therefore, betting on firms that have previously performed well may be profitable.

Furthermore, unless a company believes its share price will continue to rise, it will not split its stock. One reason is that the NYSE and Nasdaq markets have minimum share price criteria. Even at the post-split price of $300, Tesla is still a long way from meeting the current $1 per share threshold.

Q2 Earnings

Because the stock split does not affect Tesla’s fundamentals, I will not modify Tesla’s target market cap due to the split. However, as a consequence of Tesla’s Q2 earnings, I have updated my price objective for the stock since my last piece in June. After Tesla reported, I updated my $767 goal for Tech Investing Edge subscribers.

I was disappointed by the report, mostly because slowing sales growth was more disappointing than a 27% EPS beat. After management repeatedly stated that Tesla would be able to maintain >50% sales growth in the next quarters, growth slipped to 42% in Q2. Given that most Tesla models are considerably backordered, management correctly attributed the delay to manufacturing challenges rather than a lack of demand. Nonetheless, they conceded that 50% growth would be a more challenging aim to meet in the future as they scale up production.

I never accepted Tesla’s 50% growth objective, and I expect them to expand at a 25% CAGR over the next decade. Nonetheless, given management’s optimism and my forecast for slower growth in the decade’s second half, I anticipate them to remain over 50% for at least a few more quarters.

Despite this quarter’s slowdown, I believe my long-term 25% CAGR forecast is realistic since even 42% growth is substantially above that level. Management has indicated that it will re-accelerate this quarter. Consequently, despite the earnings disappointment, I boosted my price objective from $714 to $767 to account for Tesla’s now-larger ttm sales and EPS.

Conclusion

Stock splits receive much media attention but aren’t a significant concern for long-term investors. Tesla has been able to split its shares numerous times because the firm and Tesla stock have performed exceptionally well. Still, past success is no guarantee of future results.

If Tesla continues outperforming analysts’ estimates and develops rapidly, the firm and its investors will do well. However, manufacturing challenges and competition might prevent Tesla from meeting this target. The current price leaves little room for mistakes. Based on my growth projections and profitability model, I believe Tesla is somewhat overpriced as it approaches its stock split. Nonetheless, I consider Tesla stock a hold because the 14% overvaluation isn’t excessive.

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About the author: Adewumi is an expert financial writer and crypto enthusiast with more than 2 years' experience in writing crypto news and investment analysis. When not writing or reading about crypto and finance, Adewumi spends his time watching football and visiting museums and art galleries.