Last summer, as Tesla's (TSLA) stock was hovering around $1,300, the firm’s colorful founder and CEO Elon Musk noted the shares were "too expensive, imo," adding that a greater chunk of the public should be able to afford the electric vehicle (EV) darling’s shares. That tweet was soon followed by a 5-for-1 stock split.
Fast forward 15 months and Tesla’s stock is approaching a similar level following a spectacular surge this year – fueling speculation (first started by short-seller Gordon Johnson earlier this month) that Musk will announce another share division to appeal to retail investors.
“When Tesla announced it's 5-1 stock split on August 11, 2020, TSLA was at $1,373 (pre-split),” said Twitter user Sawyer Merritt. “Post split, we are now back above $1k to $1,024. Tesla will probs start to consider another split of some sort as we approach the same $1,300 level. We'll see.”
Neil Macneale, who runs the 2 for 1 Index, says the move to bolster Tesla’s free float by slashing its share price would temper a ‘crazy’ market cap which saw a temporary dent Monday after Musk said he will sell 10% of his shareholding (which has made him the world’s richest person) for tax purposes.
“Tesla has awakened the world to the possibility of electric cars but its valuation doesn’t make any sense,” notes Macneale, whose 30-strong post-split Index boasts a 12.5% annualized return since 1996.
Tesla, however, is not in it, mainly because of the rich valuation. “This company is worth more than any other automobile manufacturer combined,” adds Macneale. “At nearly 400, its price/earnings (PE) ratio is 50X higher than any other competitor. It would have to be in business making a profit for 20 to 30 years to catch up to that kind of valuation.”
Investors looking to buy Tesla should consider these metrics before engaging in “irrational exuberance” and buying the stock, warns Macneal.
Worth $150 a share?
Some Wall Street analysts would agree. Just last week, New Constructs CEO David Trainer added itself to the Tesla bear party, noting the firm would have to sell 31 million cars by 2031 to sustain its current, $1.2 trillion valuation. Tesla is worth $150 or eight times less than its current price tag, Trainer claimed, his target a stark contrast to Jefferies’ fresh, $1,400 forecast.
But David Barse, CEO of ETF investor Xout Capital, disagrees.
“They [analysts] are using traditional metrics to compare a company like Tesla to the original car manufacturers and that is just wrong,” he says. “If you apply a different valuation test and look at Tesla’s intangibles like its brand, patents and goodwill, these are huge and not factored into any of the [bear] price predictions.”
Barse, who says Tesla is a “technology company masquerading as an auto company,” says the value of Tesla’s data (as collected form its cars to power its autonomous driving software) holds tremendous potential. “The future of its data applications could include Artificial Intelligence (AI), software services and myriad other applications,” he says. “The market is misanalyzing Tesla.”
Marketing advantage
Musk “will probably relish the idea of another stock split as he seeks to be a company everyone can invest in,” adds Barse, though adding more shares could also help boost executive compensation. Nevertheless, the split can be a good marketing exercise as investors view the stock as more affordable. “This is just a perception, not a reality,” Barse notes. “But investors are marketed by the concept of buying the shares for a lower amount.”
In comments to Benzinga November 1, Johnson of GLJ Capital said Tesla would very likely split as last year’s action “helped push the stock higher, and that is really all that Tesla seems to care about…”
Following last year’s division, Tesla’s shares rallied 12% and while they dipped this winter, they are now up nearly 70% for the year. “I get it now…. If TSLA does a 20:1 split, GLJ can keep his $67 price target,” said Twitter user Gary Black, attempting to describe the rationale behind Johnson’s comments.
Bright Outlook
Split or not, Oanda analyst Ed Moya sees Tesla’s outlook brightening after announcing deals to sell cars to Hertz (HTZZ) and Uber (UBER), noting that other global rental firms will likely accelerate such orders.
“I was wrong when I said $1,000 wasn’t going to happen,” he notes. “Tesla has had a parabolic rise. They have been able to adapt and handle the chip shortage better than rivals. And while some say the valuation doesn’t make any sense, the momentum behind the stock does.”
A new split will be bullish for the stock which Moya sees hitting $2,000. “They have a massive retail following, like a cult, so if you have a split, investors will embrace it and the stock will rally.”
Moya doesn’t see much coming in Tesla’s way, not even a ‘Tesla killer’ such as Apple, which has announced a new electric car without a launch date.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Ivan Castano
Ivan Castano is a seasoned financial editor, corporate content specialist and journalist with over two decades’ experience writing for leading publications including Bloomberg, Forbes, Barron’s, MarketWatch, Euromoney and FT groups, among many other leading titles. He enjoys writing about the emerging markets, corporate finance, technology and investing.
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