The Tesla Stock Split Is Over: 5 Things to Know About Wall Street’s Most Anticipated Split

It has been one of the most trying years for Wall Street in decades. The reference S&P500which is generally considered a barometer of Wall Street’s health, produced its worst first-half performance since 1970. If that wasn’t enough, inflation hit a more than 40-year high in June and gross domestic product US has retreated in back-to-back quarters, increasing the likelihood of a recession.

While things certainly didn’t go Wall Street’s way in 2022, the investment community still managed to find a bright light amidst a bleak situation. That proverbial shining light is none other than stock splits.

Image source: Getty Images.

A “stock split” is what allows a publicly traded company to change its stock price and the number of shares outstanding without affecting its market capitalization or operations. Forward stock splits help reduce the price of a stock, while a reverse stock split can increase the stock price of a publicly traded company. Forward stock splits are usually what investors get excited about, because a company wouldn’t spin off if it wasn’t performing well and innovating more than its competitors.

Of more than 200 stock splits announced and enacted in the first eight months of the year, arguably none has been more anticipated than that of the electric vehicle (EV) maker. You’re here (TSLA 0.56%). The world’s most valuable automaker announced plans to spin off in June and, with shareholder approval, completed a 3-for-1 stock split on August 25, 2022.

With Tesla’s stock split now complete, here are five things investors should know after this highly anticipated split.

1. Tesla shares are now much friendlier to ordinary investors

For starters, Tesla completing its second stock split in as many years is a boon for ordinary investors who don’t have access to fractional stock purchases with their online broker. In the blink of an eye, Tesla’s stock price adjusted from almost $900/share to just under $300/share. In other words, investors wishing to take a stake in Tesla can now do so with a significantly reduced amount of money.

It’s worth noting that Tesla’s retail investors are quite vocal on social media message boards, and the company’s CEO, Elon Musk, knows it. The nominal reduction in Tesla’s share price is an easy way to keep these everyday investors engaged.

2. The company’s growth strategy has not changed

One of the most important things to recognize about forward and reverse stock splits is that they have no effect on the operating performance of a publicly traded company. Adjusting the share price and the number of shares outstanding is window dressing.

Following its split, Tesla’s growth strategy remains unchanged. It’s a company focused on ramping up production at its gigafactories in Austin, Texas and Berlin-Brandenburg, which went online earlier this year, as well as making new innovation. Elon Musk’s forecast calls for the Cybertruck and Semi to enter production in 2023, and the humanoid robot Tesla Bot to debut as soon as possible.

To add, stock splits have no effect on a company’s income statement or balance sheet either. Tesla’s cash position, net income, and fundamentals, such as the price-to-earnings ratio, are the same with a stock price below $300 as they were when its stock traded at nearly $900.

Chart showing the drop in Tesla's float percentage since 2013, with a steep drop since 2020.

TSLA Short Float Percentage given by Y-Charts.

3. Short-term interest rates are at historic lows

While Tesla is notorious for dividing the investment community into die-hard optimists and down-to-earth skeptics, it’s worth pointing out that Tesla’s stock split has kept the pessimists firmly on the sidelines.

One of the easiest ways to gauge the investor sentiment of a publicly traded company is to look at the percentage of float held short. A “short seller” is someone who profits from a decline in the price of a security. Simply put, the higher the percentage of shares held short, relative to the marketable float, the more negative the perception of the company.

As of August 15, only 2.35% of Tesla’s free float was held by short sellers. This is the lowest free float percentage since Tesla went public in 2010. If there’s one key takeaway from this number, it’s that Tesla’s stock price is mostly determined by buyers and sellers – not short or short selling. covering.

Chart showing the decline in Tesla's PE ratio since the end of 2021.

PE TSLA report given by Y-Charts.

4. Tesla shares are still incredibly expensive

The fourth thing to note, after the completion of Tesla’s stock split, is that the company remains exceptionally expensive, relative to legacy auto stocks.

As noted, stock splits have no effect on key fundamental metrics. When the closing bell rang on August 30, Tesla was valued at more than 52 times the Wall Street consensus earnings forecast for 2023, had a nosebleed multiple of 70 times expected earnings per share this year and was lagging around a 12-month price/earnings ratio above 100.

Although Tesla brings additional diversification to the table – the company installs solar panels and provides energy storage solutions – and is the undisputed leader in electric vehicle production in North America at the moment, it operates in a industry where single-digit futures price to earnings ratios are the norm.

Traditional car manufacturers like General Motors and Ford Motor Company can be purchased for respective multiples of six and eight times Wall Street’s forecast earnings for the coming year. These are companies with rich histories and strong brand awareness that are investing tens of billions of dollars to deploy new electric vehicles and develop self-driving vehicles.

In short, Tesla’s stock split doesn’t remove questions about its valuation.

Tesla CEO Elon Musk speaking behind a podium at the Shanghai Gigafactory groundbreaking ceremony.

Elon Musk at the groundbreaking ceremony for the Shanghai Gigafactory. Image source: Tesla.

5. Elon Musk remains the company’s biggest risk/liability

Fifth and finally, the completion of Tesla’s stock split in no way hides the company’s greatest liability: its own CEO.

Although Musk is considered a visionary and potentially inseparable from Tesla, when examined from an investment perspective, he brings a host of legal, financial and operational risks to the table that could quickly deflate Tesla’s valuation. his company’s premium. For example, Musk’s possible acquisition of a social media platform Twitter represents the latest in a long history of questionable decision-making by a CEO who should be focusing on the world’s most valuable automotive brand.

But the bigger concern here is that Musk’s forward-looking statements, which play a key role in supporting Tesla’s expensive valuation, have a history of missing the mark. Tesla’s stock split doesn’t change the fact that Musk’s empty promises could come back to bite shareholders.

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