HomeTeslaIs Tesla’s stock split good for investors? (NASDAQ:TSLA)
Is Tesla’s stock split good for investors? (NASDAQ:TSLA)
August 25, 2022
After the second quarter profit, I updated my Tesla price target (NASDAQ:TSLA) shares to $765 pre-split, which represents a 14% downside to the current price. As I have shared in previous articles (1, 2), the main assumption is in: my model is that Tesla will grow at 25% CAGR over the next decade, mainly due to the growth in electric vehicle sales. While the upcoming Tesla stock split is irrelevant to my contention, investors may have questions about how the split works, and I’ll try to answer some of the most common in this article.
Share Split FAQ
I covered Tesla’s stock split in my last article, but I’ll summarize some of the key questions and answers about the split here. Those who have read my previous article or have experience with stock splits can skip to the next section.
How do stock splits affect your investment?
The total value of your investment is not directly affected by the stock split, as a company’s market capitalization remains unchanged through stock splits. The drop in the price per share is offset by the increase in the number of shares you own.
For example, suppose Tesla is worth $900 before the split and you have one share. After the split, you will have three shares, but each is worth $300. Either way, you have $900. Sure, the value of Tesla stock can change as the market rises and falls from day to day, but that happens regardless of whether a split occurs.
It’s also worth noting that the price per share and price per option contract will be lower after the split, making non-fractional stocks and options more accessible to retail investors.
What happens if you buy Tesla before the split?
Buying Tesla stock before the split isn’t much different than buying it after the split or on any other day. You would buy 3x fewer shares before the split than after the split to keep the total amount invested the same.
When Will Tesla Stock Split?
You will receive two additional shares of Tesla stock on Wednesday, August 24 after the market closes for each share you already own. The shares will start trading at their post-split price starting Thursday, August 25.
How often does Tesla have Stock Split?
This is the second time Tesla has split its shares. Tesla previously did a 5-for-1 stock split on August 31, 2020. Since then, its shares have risen more than 100%.
Is Tesla’s stock split good for investors?
In other words, do stock splits affect performance? This is probably the most important question for most investors and also the hardest to answer.
There is some evidence that companies that split their stocks outperform overall in the short term, perhaps in part because splitting allows some stocks to be included in indexes like the Dow and increases their accessibility to retail investors. However, if we look at individual stocks, there are many instances where a stock falls around the time of the split. Therefore, I would not recommend betting on short-term price increases in a single stock due to the split.
However, splits are certainly not bad news. They usually only happen after a stock has risen sharply in value, as Tesla stocks have done in recent years. Winners tend to keep winning, so betting on companies that have already done well can be a successful strategy.
Also, companies usually won’t split their shares unless they believe their share price will continue to rise. One of the reasons is that there are minimum requirements for the stock price to be listed on the NYSE and Nasdaq exchanges. That said, even at the post-split price of ~$300, Tesla is a long way from falling to the current $1 per share requirement.
Turning to more important considerations such as earnings growth and valuation multiples, stock splits are essentially a neutral event for long-term investors. But in a vacuum, it’s clear that stock splits are more positive than negative.
Because the stock split will not affect Tesla’s fundamentals, I will not adjust my target market cap for Tesla as a result of the split. However, I have updated my Tesla price target since my last article in June due to Tesla’s Q2 earnings. I shared my updated goal of $767 with Tech Investing Edge members after Tesla reported it.
I was disappointed with earnings, mainly because I found slowing revenue growth more disappointing than 27% EPS was impressive. After management continued to talk about Tesla’s ability to maintain revenue growth of >50% in the coming quarters, growth fell to 42% in the second quarter. Since most Tesla models are heavily backordered, management rightly blamed the delay on production issues rather than a lack of demand. Still, they admitted that 50% growth would be a more difficult target to achieve in the future as they work to ramp up production.
I never believed Tesla’s 50% growth target and modeled them to grow at a CAGR of 25% over the next decade. Nevertheless, I expected them to remain above 50% for at least a few more quarters, given management’s optimistic stance and my expectation of slower growth in the second half of the decade.
Despite the slowdown this quarter, I still think my long-term target of 25% CAGR is achievable, as even 42% growth is well above that level and management anticipated a re-acceleration this quarter. So, despite being disappointed with earnings, I raised my price target from $714 to $767 to account for Tesla’s now larger ttm earnings and EPS.
Stock splits often get a lot of media attention, but for long-term investors, that’s okay. Tesla has been able to split its shares multiple times because the company and Tesla stock has done very well, but that is no guarantee of future performance.
If Tesla continues to beat analysts’ expectations and grow rapidly, the company and its investors are likely to continue to do well. However, production issues and competition may prevent Tesla from achieving this goal, and the current valuation doesn’t leave much room for error. Based on my own growth estimates and profitability model, I think Tesla is slightly overvalued in going into its stock split. Nevertheless, I consider Tesla stock a hold, as ~14% overvaluation is not extreme.