Stock Analysis & Ideas

Tesla Stock: Long-Term Hypothesis Boosted by Stock Split

Story Highlights

Tesla’s share price has taken a tumble amid inflationary pressures, causing the company to look to downsize its workforce. However, these troubles are transitory, and its stock split significantly adds to its attractiveness.

Tesla (TSLA) is the world’s biggest automaker by market cap, but where does it stand today? Tesla’s shares shed around 9% on Friday after Musk shared his concerns regarding the economic meltdown with employees. TSLA stock took another hit on Monday and dropped by 4.8%. These shocks, though, will have little impact on Tesla’s long-term growth story.

Growth stocks such as TSLA continue to struggle due to the continual increase in inflation rates. High inflation has resulted in the highest interest rates in years, leading to a healthy increase in the cost of car loans.

The Oracle Of Omaha, Warren Buffet, has repeatedly mentioned that “interest rates act as a gravity to asset prices,” which happens to be the cause of the TSLA’s suffering.

Nevertheless, Tesla has been one of the largest automotive companies. It consistently reported market-beating results and has been the pick of the EV stocks. Over the past five years, its revenues have grown over 53.44% with a healthy increase in earnings. Results of late have also been stellar, with year-over-year improvement in sales at over 73%. Moreover, its free cash flow margin has also improved by triple-digits.

However, is inflation the only reason TSLA has declined? Or is there more to the downside of the stock than just the high inflation and higher interest rates? Let’s take a look.

On TipRanks, TSLA scores a 2 out of 10 on the Smart Score spectrum. This indicates a high potential for the stock to underperform the broader market.

Employee Layoffs – Bad News for Tesla

News website, Electrek, acquired a leaked email that Musk shared with company employees. The email showed that Tesla had a “tough quarter” and that the company planned to downsize the workforce by 10%.

The email also mentioned that the company planned to “pause hiring worldwide,” which entails that Tesla will significantly reduce the thousands of open positions it was advertising when the email was dispatched.

In contrast, it is interesting to note that Tesla isn’t new to layoffs. The company reduced the workforce by 7% in 2019 and managed to sustain incredible growth. Given how Tesla dealt with layoffs earlier, there’s a probability that the company might benefit from the downsizing.

Along with this, China’s decision to extend the lockdown has created supply chain issues for Tesla, and Musk is evidently ringing the panic button on the U.S. economy. However, the company is of the belief that China will ease lockdowns that will rectify the demand-supply imbalance.

A Brighter Future

Recently, Tesla submitted an annual proxy statement and released its proposal for a 3 for 1 stock split. The stock split is intended to allow for employees to more easily scoop up company shares. In addition, Tesla believes that this decision will reset the common stock price and make it more accessible to individual traders

Many companies use stock splits when stock prices are exorbitant, such as the case with Tesla. TSLA stock had been trading at a nosebleed valuation which had made it almost uninvestable. The recent market downturn has reduced the frothiness of the EV market, and the stock split will further reduce the stock price to more attractive levels.

Furthermore, Musk plans on utilizing Tesla shares to acquire Twitter and reduce his stake in the company to augment financing. The stock split will have little to no impact on Tesla’s fundamentals, but it will allow investors to buy the stock by stabilizing the share price.

Wall Street’s Take

Turning to Wall Street, TSLA stock maintains a Moderate Buy rating. Out of 30 total analyst ratings; 16 Buys, eight Holds, and six Sell ratings were assigned over the past three months.

The average TSLA price target is $917.10, implying 38.39% upside potential. Analyst price targets range from a low of $67 per share to a high of $1,580 per share.

Bottom Line – Is Tesla a Buy?

Tesla is expected to grow sales and experience rapid growth in the next 12 months. In the first quarter of 2022, Tesla enjoyed an earnings per share of $3.22, with sales rising by 81%. Moreover, with the substantial reduction in its stock price, it offers an attractive risk/reward.

Aside from the supply chain issues and Musk’s rocky Twitter acquisition saga, the volatility in the U.S. economy has affected TSLA. Moreover, its lofty price multiples haven’t helped either. Nevertheless, the EV titan’s long-term bull case remains intact.

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