Tesla’s (NASDAQ: TSLA) first stock split is set to go into effect at the end of August, with current shareholders receiving four additional shares for every share held (5-for-1 split). Now, although the split doesn’t change the fundamental picture for Tesla, it is a positive sign for a couple of reasons.
Tesla’s stock is up 4x this year, trading at about $1,870 as of Wednesday. By implementing a stock split the shares would be brought to a more accessible price (close to $370 based on the current price). This could increase demand for the stock, considering Tesla is a high profile name with a large retail investor following. This could help drive up Tesla’s valuation in the near-term.
Separately, shares of split stocks, on average, have outperformed the market in the years following a split. Splits are also an indicator that management is confident about a company’s prospects, signaling that growth could remain strong going forward. Let’s take some big tech companies as an example.
Apple’s Market Cap Up 3.4x Since The Last Split, Google Up 2.5x
Apple has split its stock four times since it went public. Since the most recent split in June 2014, Apple’s market cap has grown from about $570 billion to about $1.95 trillion currently, an annualized rate of about 23%. The growth rate has been even stronger when we consider the 2005 split – with Apple’s valuation rising 33% annually and revenues up 20x. Apple has announced another 4-to-1 split that will go into effect at the end of this month.
Similarly, Google’s market cap is up an annualized 16% since its 2014 stock split, with its Revenues jumping almost 2.5x since then. Microsoft, despite its significant underperformance through the 2000s, saw its market cap rise by about 12% annually since its 2003 split, outperforming the S&P 500 which returned about 9% annually between 2003 and 2020.
Can Tesla Do The Same?
So Google and Apple have roughly tripled their market cap since their recent splits. Could Tesla replicate Apple and Google’s success post its split? Sure, the company has multiple avenues for growth including its fast-growing self-driving software business, an exciting pipeline of new models, and progress with battery technology. However, Tesla’s split comes at a time when the company is at a relatively early stage of the growth cycle. Tesla is already richly valued with its P/E standing at over 200x, based on consensus projected 2020 earnings, meaning that the company will have to execute very well to simply justify its current valuation, let alone drive further stock price gains. On the other hand, Apple’s P/E stood at 14x during its most recent split while Google’s P/E stood at 25x during its first (and only) split.
Is this a good time to jump into Tesla stock? Yes – especially if you believe in this one important Tesla metric: Tesla’s Time Horizon. On the flip side, for a more balanced, risk-adjusted view see our analysis Tesla Valuation: Jump Into Tesla, Wait, Or Get Out?
What if instead you are looking for a more balanced portfolio? Here’s a top-quality portfolio to outperform the market, with 170% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk. It has outperformed the broader market year after year, consistently.
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Original Publication by Trefis Team at Forbes.
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