In theory nothing changes when a stock split occurs but in reality more buyers can afford to scoop up shares and so prices often rise when demand increases. As a result, stock splits are often viewed as bullish signs, even though theoretically nothing in the company’s fundamentals have changed.
Recently, Alphabet split its shares 20:1 from over $2,200 per share to closer to $110 per share. Now the question is what big name stock is next?
Tesla 3:1 Split Means EPS Will Fall
Next up on the chopping block for a stock split is Tesla. Shareholders need to sign off on management’s proposal to split shares 3:1 during the company’s next annual meeting. If they do, the 3:1 split will follow a 5:1 split in August 2020.
At the time, the 5-for-1 split was astonishing. COVID was still top-of-mind and, while stocks had bounced off their March 2020 lows, many naysayers expected share prices to plummet back down to earth. But Tesla defied the odds and soared in spite of all the bearish sentiment.
Don’t Buy Tesla Because Of The Stock Split
If you’re considering investing in Tesla, and buy into the thesis that a lower share price will attract buyers who otherwise would steer clear of the stock at higher price points, that’s fine. But a better reason to jump on board the Tesla train is to focus on the company’s underlying financial statements.
Unit sales have been nothing short of astonishing. Over the past twelve months, volume has increased by over 50% to an astonishing 1,100,000 vehicles delivered. Keep in mind that growth took place during unprecedented supply chain disruptions and production hurdles that included plant closings in China.
Tesla has a problem every company wishes it had: too much demand. When unit sales fall it’s not because customer demand is waning but rather challenges in supplying the orders placed by customers.
So while Tesla has disappointed on a quarter over quarter basis on its top line, the year over year growth and underlying demand remains positively higher.
Will Tesla Volume Increase 10x?
Elon Musk has made it clear that the goal is to produce 2,000,000 vehicles a year, which will be achieved through scaling capacity at its gigafactories, both in Berlin and Texas.
But 2 million vehicles annually is just the beginning. In fact, it’s just 10% of Tesla’s stated goal for the end of the decade, which is an astonishing 20,000,000 vehicles per year.
If you haven’t looked inside the quarterly or annual reports for Tesla you might be surprised to discover this is no ordinary car manufacturer but a leading software company that also houses a solar power company too.
Undoubtedly, Tesla trades at a rich premium compared to its car manufacturing peers, but so too does it possess very unique characteristics that position it ahead of its competition. The reality is it’s unlikely to see its market share eroded in a hurry anytime soon yet the EV market as a whole is expanding rapidly.
If you focus simply on quarterly numbers, it’s easy to get derailed from the long-term thesis that is still very much in tact. This is a company that deserves a position on your watchlist at the very least, if not your portfolio.