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Friday, August 26th, 2022 11:16 am EDT
Tesla’s 3:1 stock split went into effect mid-week, so the number of Tesla shares in circulation increased threefold.
This is the second Tesla stock split over the last two years. In the first case, Tesla’s 5:1 stock split soared over 70% higher in the month following the announcement.
The goal of a split is to make investing in the company more affordable due to lower stock purchase price and to address the growing need to diversify a company’s investor base. A stock split really doesn’t add any value to a company. Sometimes it’s considered little more than a positive psychological boost for investors.
The Tesla Stock Trajectory
Ah, what a difference a decade makes. Tesla debuted in 2010 at $17 and in a decade surged to a peak price of $2,000. It went from obscurity to becoming one of the highest priced shares on the stock exchange.
The institutional investors who own the largest stakes in Tesla include investment advisors and managers, banks, financial services firms, and asset management companies. As a group, they account for the largest portion of Tesla’s shares and have a real impact on the share price. Institutional investors accounted for around 431 million, or 42% of share ownership, as of July.
By its peak stock price, the company’s high share price prevented many small investors from placing money in the high-growth stock (unless using trading platforms like Robin Hood that allow for purchase of a portion of a share).
Tesla stock had fallen by nearly 25% in 2022 prior to the split, reflecting trends across the market. Then, again, shares of the world’s leading manufacturer of electric vehicles (EVs) exploded nearly 200% since the last stock split in August 2020.
Tesla first revealed its intentions to split its stock again in March, 2022 as part of its annual proxy statement. Here are some of the key points listed in that statement:
- As of June 6, 2022, we have 1,036,390,569 shares of common stock outstanding, and the current number of authorized shares of our common stock is 2,000,000,000, which is insufficient to effectuate the Stock Split.
- Our success depends on attracting and retaining excellent talent, not only through providing a respectful, safe, inclusive and equitable workplace, but also through offering outstanding benefits and highly competitive compensation packages.
- Unlike other manufacturers, we offer every employee the option of receiving equity.
- We believe the Stock Split would help reset the market price of our common stock so that our employees will have more flexibility in managing their equity, all of which, in our view, may help maximize stockholder value.
- In addition, as retail investors have expressed a high level of interest in investing in our stock, we believe the Stock Split will also make our common stock more accessible to our retail shareholders.
Since June, Tesla shares rose over 30% and edged close to $900. The stock split decision wasn’t official until the annual stockholders’ meeting this month.
The Trajectory after the Tesla Stock Split
In Q1 2022, Tesla reported quarterly revenue of $16.9 billion — 42% YTY. Tesla’s Q2 2022 earnings beat most analysts’ expectations.
Tesla stock closed at $891.29 before the split on Wednesday. When the stock split occurred after market close that day, each investor gained about two additional shares. Shares of the all-electric vehicle maker seemed to catch on fire a bit in after-hours trading.
The stock opened on Thursday at $302 and closed at $296.07. In an after-hours snapshot Thursday, Tesla came in at $297, or +.47%. At this writing at 1:26 pm on Friday afternoon, Tesla was down slightly to $290.
In many cases, a stock split doesn’t outperform the broader market until 1–3 years following the split. A study by Nasdaq points out that just announcing a stock split gave an average boost of 2.5% to a stock. That boost added to an average stock outperformance of almost 5% after one year.
Between 2017 and 2021, Tesla expanded at a compound annual rate of 46%. Based on analysts’ estimates, of $83.9 billion in 2022 sales, that growth rate will accelerate to 56% this year. In 2023, continuing that trend, the company could generate over $100 billion in annual revenue for the very first time.
The State of Tesla: Influences from Multiple Sources
Yes, supply chain disruptions and the Shanghai Gigafactory closure due to Covid-related government lockdowns impeded the company’s production potential. Then again, 2 new gigafactories in Austin, Texas, and Berlin, Germany, have been added to the company’s manufacturing lines, leading to the likelihood of 2 million cars per year by the end of this year.
“After brutal shutdowns in April/May due to the zero Covid policy, we are now seeing unprecedented Model Y production in China after factory upgrades with Musk & Co. on a pace to produce over 1 million vehicles annually out of this key product artery,” Wedbush analyst Dan Ives said in a note to clients on Thursday.
“Demand is not the problem for Tesla, but supply has been and is now clearly on an upward trajectory with China on its next level of Model Y production while Berlin and Austin ramp its production lines into year-end,” Ives added. “While the shaky macro will clearly trim some demand for Tesla (as well as the industry), we believe demand continues to hold up firm for the EV stalwart across the US, Europe, and China.”
We are adjusting our pre-split $1,000 price target ($333 post split) to $360 reflecting the 3:1 split as well as improved production from Tesla out of its key China Giga factory during the September quarter with clear momentum heading into year-end. Maintain Outperform rating.
— Dan Ives (@DivesTech) August 24, 2022
The Inflation Reduction Act’s new $7,500 tax credit for EVs could provide a growth spurt for Tesla, contributing to greater stock valuation and the company’s bottom line.
Tesla CEO Elon Musk forecasts a production growth rate 10× higher by the end of the current decade. To reach that, the company plans to build 10 to 12 more gigafactories.
The Motley Fool says that investors should remain focused on Tesla’s long-term potential — “especially since there’s so much of it.” Its analysts describe Tesla’s success as derived partly from the catalog’s popularity but also the “precision of its production processes, which has allowed the company to rapidly scale and remain dominant even while expanding into new countries.” Investors, they deduce, should focus on Tesla as a company rather than inconsequential factors like its stock split.
Tesla investors could be in for good news, Forbes concurs. While past performance doesn’t predict future results, if Tesla’s trend holds, they say it’s possible that this stock split could see investors holding twice the stock at twice the value in a few years — again.
Amazon and Alphabet (the parent company of Google) have divided shares this year in attempts to inspire shareholder enthusiasm. As with Tesla, the stock splits gave employees who receive stock-based compensation more flexibility in enacting their benefits.
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