Tesla (NASDAQ: TSLA) shares took a nice rise on Wednesday, saying the electric vehicle maker will split its shares later this month. Shareholders will receive five new shares for each of them. The combined value of these shares will be equal to that of one of the pre-split shares at the time of the split.
Would investors better serve to buy this growth stock now? Above all, after the five-for-one share split, Tesla shares will be more accessible to many investors. Shares are trading at around $ 1,550 today – assuming they stay in that vicinity, the stock-regulated share price of the electric vehicle maker will be around $ 310.
To buy or not to buy?
There are really two questions here.
- Is buying Tesla shares because of its future shareholding?
- Does the stock appear to be attractive now, despite the pending split?
Let us consider the answers for both.
Implications of Tesla stock splitting
The first question is simple to answer. No. A stock split does nothing to make the company more valuable – and should have no bearing on an investor’s appearance over the long-term stock potential.
Of course, there may be an increase in demand for shares when they become more accessible to a larger base of investors (among them, those who do not already use brokerage services that allow the purchase of partial shares). Further, a similar increase in demand may occur because the move gives Tesla a greater chance of being added to Dow Jones Industrial Average; a number of experts have noted that the current price of his share would be a breach of agreement in terms of his inclusion in the weighted price index. However, over a long period of time, Tesla’s share price will largely be driven by the underlying performance of the company’s business – and a share split has no bearing on the real, long-term potential of a business.
A look at evaluation
What about the second question? This requires a more thoughtful analysis.
Is Tesla worth its market capitalization – $ 288 billion at the time of this writing? That answer will depend on whether he can continue to grow the number of cars he delivers each year at a rapid pace over the next decade, and whether he can eventually generate substantially higher revenue from his vehicle program. Both of these results are controversially priced today in stock. With just $ 800 million in 12-month cash flow, the price-to-turnover ratio of 360-dollar stock cash in a decade of tremendous execution and huge sales growth.
While Tesla may continue to dominate the electric vehicle market and increase its vehicle deliveries at a rapid pace over the next decade, the current stock valuation requires a leap of confidence for me to personally recommend buying it at this level.