Is Tesla (TSLA) Eyeing More Upside With Stock-Split Decision?

If we have to pick one auto stock that has turned jackpot for investors in the past decade, it has to be Tesla TSLA. The red-hot electric vehicle pioneer has taken the financial markets by storm, which is indeed one of the biggest success stories in the past 10 years. Tesla bears were doomed when the firm smashed second-quarter 2020 forecasts last month and posted the fourth consecutive quarterly profit, which qualified it for inclusion in the elite S&P 500 list.

Tesla’s Insane Rally Results in Stock Split

Since the first day of trading in 2010, Tesla has skyrocketed around 6,408% and has become the most valuable automaker on the planet. While the stock currently trades around $1,554, shares are likely to drop to around $300 soon. But there is a catch here! The decline will be a result of the stock split that the company announced on Tuesday evening. Tesla is splitting its shares in a 5-for-1 exchange. Its shareholders of record on Aug 21 will receive four additional shares at the close of trading on Aug 28. Post-split trading will begin on Aug 31.

It should be noted that the stock split does not change any of the business fundamentals and has no effect on the company’s worth, as measured by its market capitalization. It does nothing to boost the underlying intrinsic value of its shares. Despite that, the company’s shares rose 13.12% yesterday to close the session at $1,554.76. However, logic has long taken a backseat when it comes to rationalizing Tesla’s share price movement. Even the company’s CEO Musk tweeted on May 1 that the share price of Tesla is too high.

It seems that investors are betting that the stock will be in greater demand at a lower price point because of the split. While the split may drive its price in the near term, the long-term story of Tesla will depend on the underlying business fundamentals. Hence, buying the stock right now — primarily based on the split announcement — would rather make for a hasty investment decision. Tesla currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Nonetheless, the stock split is a timely decision to capitalize on Tesla’s crazy run on the bourses of late, which has pushed its valuation to lofty levels despite cash burn concerns. Tesla stock price has reached such meteoric levels that even purchasing one share of the firm seems too pricey for small investors. The move will make the stock more affordable, especially at a time when EV trends are getting hotter day by day, with investors being worried about missing out on betting big on the same.

Stock Split Clears a Major Hurdle to Join Dow Index

While stellar second-quarter results have indeed put Tesla on track to electrify the S&P Index, the stock-split decision also qualifies the stock to join the Dow Jones Industrial Average Index. The major obstacle in Tesla’s entry into Dow was the firm’s astronomical share price, which has soared to four-digit territory. Since the Dow Jones Industrial Average is a price-weighted index, Tesla would command an unjustifiable high influence over Dow than any other stock.

While Tesla claims to have gone for 5-for-1 stock split only to make the ownership of shares more accessible to employees and investors, the post-split stock price would certainly clear the major speed bump in Tesla’s way to Dow. At the current trading price of more than $1,554, the stock split would put Tesla stock at around $310, making the electric car maker the third most influential stock on the index, just behind Apple AAPL and UnitedHealth Group UNH. Also, it would be the only car company on the index. As a matter of fact, General Motors GM had been removed from the prestigious index in 2009 after bankruptcy amid the 2008 financial crisis. However, there are not any obvious candidates to be ousted from the list to make way for this EV maker.

Last Words

Obviously, there’s a lot going in favor of this firm including robust Model 3 demand, ramp up of Model Y production, significant Shanghai Gigafactory progress, ambitious Berlin Gigafactory, amazing line-up of upcoming products and aggressive expansion efforts. To add to that, the company’s smashing results have somewhat silenced the Tesla skeptics, removing concerns that the firm is structurally unprofitable.

With many factors working in favor of the stock, one can see the stock making way to the S&P 500 list. With the current stock-split decision, Tesla could also get invited to join the Dow Jones Industrial Average, if any vacancy comes up in the elite band of 30 companies.

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