Tesla (TSLA) announced a plan to table a stock split vote to its shareholders in an attempt to provide access to a broader range of investors. The American electric vehicle manufacturer’s board approved the idea of a stock split by the firm’s management team, and it will be subject to final board approval, providing a favorable vote from the firm’s ordinary shareholders.
Tesla executed a 5-for-1 split in 2020, which ultimately led to its stock gaining in value. Investors clearly anticipate much of the same this time around, as the stock is currently surging. I am bullish on the stock.
What is a Stock Split Exactly?
A stock split is considered a type of dividend in which a company issues additional stock after a period of significant price appreciation in order to make its stock more investable.
There are no economic effects on the company after a stock split, and the shareholder’s cost basis remains unchanged. The after-effect will be an unchanged price-to-earnings ratio, a halved earnings per share, and a constant dividend yield, which doesn’t apply to Tesla as it doesn’t offer cash dividends to its shareholders.
Prior evidence suggests that S&P 500 stocks usually benefit from stock splits. A Cambridge-published study recently revealed that stocks listed on the S&P 500 generate a median excess return of 3.38% due to stock splits alone.
Furthermore, the consensus is that stock splits occur when management believes that the company will perform well internally and, in turn, synthesize a more affordable stock for market participants.
How Will This Change Matters for Tesla’s Stock?
The aftermath of a corporate event shouldn’t be judged in isolation. So, let’s look at the state of Tesla’s business activities.
There’s been much conversation surrounding stagnant business activities in China due to another Coronavirus wave. In addition, many investors have been bearish on Tesla stock because of rising input costs.
However, it needs to be considered that Tesla is a stock that surged during the pandemic, even though there were mass lockdowns and existing inflation. The reason for this could be Tesla’s status as a hypergrowth stock due to its successful delivery to two powerful consumer markets, namely the U.S. and China.
It’s evident that the company managed to outgun inflation by examining its Cash-flow-to-CapEx metric, which has improved by 340% year-over-year during a period in which its CapEx increased by 148%.
Additionally, Tesla’s operating profit margin has improved by 96.8% during the past year, indicating that the company is managing its operating leverage much better than it did in the past, thus providing more value to its shareholders.
It’s believed that Tesla has performed well in recent times because of its increasing sales numbers in China, rising 100% for the second year in a row. China’s inflation rate is still relatively subdewed at 0.90%, which could translate into a sustainable consumer market and subsequent benefits for Tesla.
From a U.S. vantage point, Tesla will likely sustain its sales as the nation’s real GDP has expanded by 204% quarter-over-quarter. This statistic is very much overlooked in my point, as many analysts are dialed in on rising inflation.
Investor Sentiment
TipRanks’ Stock Investors tool shows that investors currently have a Very Positive stance on Tesla, as 1.2% of investors on TipRanks increased their exposure to the stock over the past 30 days.
Wall Street’s Take
Turning to Wall Street, TSLA stock earns a Moderate Buy consensus rating based on 16 Buys, five Holds, and six Sells assigned in the past three months. The average Tesla price target of $1063.88 implies 0.6% downside potential.
Concluding Thoughts
A potential stock split would lure a broader pool of investors to Tesla stock, which could possibly cause a price surge. Tesla is still in great shape as a business and an asset. Thus most corporate actions will likely be well received by the market.
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