Tesla (NASDAQ: TSLA) shares received a nice boost on Wednesday after word that the electric carmaker will split its stock later this month. Shareholders will receive five new shares for each one they own. The combined value of those shares will be equal to what one of the pre-split shares is worth at the time of the split.
Would investors be better served to buy this growth stock now? After all, after the five-for-one stock split, Tesla shares will be more accessible to many investors. The stock is trading at around $ 1,550 today – assuming they stay in that range, the split-adjusted share price of the electric car will be around $ 310.
Image Source: Tesla.
To buy or not to buy?
There are really two questions here.
- Is Tesla a buy because of its upcoming stock split?
- Is it casually appealing, just like splitting the department?
Let us examine answers to both.
The implications of Tesla’s stock split
The first question is easy to answer. Now. A share split does nothing to make the company more valuable – and it should not affect an investor’s view of the potential term of the stock.
Sure, there can be a spike in the demand for the shares as they become more accessible to a larger base of investors (among them, those who do not use brokerage services that allow the purchase of fractional shares). Furthermore, a similar increase in demand may occur, as the move gives Tesla a greater chance of being added to the Dow Jones industrial average; a number of pundits have noted that its current share price would be a deal-breaker in terms of its inclusion in the price-weighted index. In the long run, however, the price of Tesla shares will be driven primarily by the company’s underlying performance – and a share split will not affect a company’s real, long-term potential.
A look at appreciation
But what about the second question? This requires a more thoughtful analysis.
Is Tesla really worth its market capitalization – $ 288 billion at the time of this writing? This answer will depend on whether it can continue to grow the number of cars it supplies annually at a rapid rate in the coming decades, and if it can eventually generate substantially higher revenues from its car software. Both of these outcomes are priced in the stock today. With only $ 800 million in subsequent 12 months of free cash flow, the price-to-free cash flow ratio of 360 of beacons in a decade is worth unbelievable execution and enormous sales growth.
While Tesla may continue to dominate the electric car market and its car supplies grow at rapid rates over the next decade, the current appreciation of the stock requires too much of a leap of confidence for me to personally advise to to buy it at this level.
