Source: PaxForex Premium Analytics Portal, Fundamental Insight
Tesla shares on Wednesday got a boost after it was announced that the electric car maker would split its shares later this month. The shareholders will receive five new shares for each of their own. The total value of these shares will be equal to the value of pre-split shares.
Wouldn't it be better for investors to buy these growing shares now? In the end, after the 5-to-1 split, Tesla shares will be more accessible to many investors. Today's shares are traded at about $1550 - assuming that they remain in the same price zone, the price of the car maker's shares, adjusted for the split, will be about $310.
Accordingly, two questions arise.
Are the shares of Tesla an object of investors' interest due to the forthcoming share split?
Are the shares attractive now, regardless of the forthcoming split?
Let's look at the answers to both questions.
The first question is easy to answer. No. A stock split does nothing to make a company more valuable - and it should not affect an investor's opinion on the long-term potential of the stock.
Of course, there may be a surge in demand for shares when they become more available to a wider base of investors (among them those who do not yet use brokerage services to buy split shares). Also, such a surge in demand may occur because it gives the company a better chance to be included in the Dow Jones Industrial Average. Some experts say that the current share price of the company will be a decisive factor for its inclusion in the price index. However, in the long term, the price of Tesla shares will be determined primarily by the company's basic performance indicators, and the share split will not affect the real, long-term business potential.
But what about the second question? It requires a more profound analysis.
Is Tesla really worth its market capitalization - 288 billion dollars at the moment of writing? That answer will depend on whether it can continue to rapidly increase the number of cars it supplies annually over the next decade, and whether it can ultimately generate significantly higher revenues from its automotive software. Probably today, both of these outcomes are embedded in the stock price. With only $800 million of free cash flow for 12 months, the stock's price/flow ratio is 360, which provides incredible performance and huge growth in sales.
While Tesla may continue to dominate the electric vehicle market and increase vehicle shipments at a rapid pace over the next decade, investors should still add the company to their watchlist.