Source: PaxForex Premium Analytics Portal, Fundamental Insight
With so much momentum in both Tesla's stock price and its core business, isn't it time for the automaker to consider splitting its stock again?
It's hard to believe, but it's only been six months since Tesla surprised investors with the announcement of a 5-to-1 stock split. Despite the stock split, its price has already risen by more than half since last August. Also, it's not just the stock that has gained momentum since last summer: electric car sales have surged, and profitability now looks like it's here for good. This could be a sign that this year's stock gains could lead to another split.
Before we get into this issue, let's get some fundamentals straight.
First, it's worth explaining what a stock split is. The most important thing to know about stock splits is that it does not technically make investors richer or give the company whose stock is being split additional capital. A stock split is simply the division of one stock into several new shares with a value equal to the original stock.
Still not quite clear? Let's try this analogy: suppose you owned one share of Tesla. Now think of that stock as one whole pizza. Then someone comes along and cuts the pizza into quarters. As long as you have the sliced pizza, the total amount of food remains the same. The same is true of the total shareholder ownership value in the company before and after the 4-to-1 stock split.
The critical point here is that the stock split does not create shareholder value. Of course, Tesla stock has risen sharply since the recent stock split - but that is not always the case. The stock growth is related to business results, including strong sales growth and improved profitability. Besides, the company simply grew thanks to analysts and Wall Street and became the beloved company of the stock market.
Usually, companies don't consider a subsequent stock split unless several things happen. First, the stock has to trade significantly higher than its previous split. After all, one of the main reasons companies split their stock is to make the stock more accessible to retail investors. This makes the stock more liquid and available to more investors.
Certainly, Tesla meets this criterion. Since the company announced the stock split last August, the stock has risen nearly 200% on a split-adjusted basis. Today, the stock is trading at around $800, well above the average share price of most companies.
Also, a good argument for another stock split is the company's strong recent business progress. If the stock's rise was based solely on idle chatter, there's no telling how long the stock could stay at its elevated levels. And if the stock had a good chance of losing all of its recent gains, why split the stock again?
Fortunately, the company's core business seems to be operating at full capacity. At the time the stock split was announced, vehicle deliveries for 12 months were about 388,000. Today, that figure stands at 500,000. Besides, management was targeting 2021 deliveries of over 750,000, which shows that the company is still in the early stages of growth.
Finally, Tesla's quarterly free cash flow and cash on hand increased from $418 million and $8.6 billion in the second quarter of 2020 to $1.9 billion and $19.4 billion in the fourth quarter of 2020, respectively, giving the company a much healthier financial performance to date.
Of course, Tesla investors shouldn't expect a stock split in 2021. There's simply no telling when the auto and green energy company might split its stock again - if ever. Also, there is no reason to get excited about a potential stock split, since it creates no shareholder value, but still can provide some momentum. Nevertheless, there seems to be a growing possibility of another stock split.
While the price is above 727.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 816.00
- Take Profit 1: 909.00
- Take Profit 2: 955.00
Alternative scenario:
If the level 727.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 727.00
- Take Profit 1: 653.00
- Take Profit 2: 610.00
