Tesla’s Stock Split May Disappoint

Tesla’s (TSLA) second stock split in as many years takes effect today as the stock splits 3 shares for 1.  Tesla’s previous stock split in 2020 was among several factors that drove the stock up more than eightfold that year.  However, the stock is down -12% since late March when it declared its plan to do this current split.   Telsa is down about -1% so far today on a split-adjusted basis.

A slowdown in the economy and rising interest rates have hammered technology stocks this year, making today’s stock split no guarantee for further gains in the stock’s price. The performance of Amazon.com (AMZN) and Alphabet (GOOG) this year after announcing their stock splits suggests Tesla’s share price may also struggle to improve.  Amazon shares fell more than -10% from when it announced its split to the day it became effective, and Alphabet lost -21% between those events.

Tesla is down -12% since late March when it declared its plan for a split, far different from 2020 when Tesla stock surged 60% from announcement to the last close before the beginning of split-adjusted trading.  Rainmaker Securities said, “the stock split smoke-and-mirror boost is much more prevalent in a bull market when retail investors rush into stocks.  In bear markets, retail investors tend to be less involved, and the institutional players would never be fooled by a stock split to move into a stock.”

A stock split involves no change in the fundamentals of the company and therefore presents no reason for the stock price to move.  However, a stock split can improve retail sentiment towards a stock because they can buy the stock at a lower entry price.  Famously, Warren Buffett is not impressed by stock splits, which is why a single share of Berthshire Hathaway (BRK.A) currently costs $446,300.

Valuation concerns of Tesla may also hold back investor interest in the stock.  Tesla trades at 57 times forward earnings estimates compared with 17 times for the S&P 500 Index ($SPX) (SPY).  Also, the average analyst price target implies a decline of about -3% over the next twelve months, even as the S&P 500 Index is expected to rise more than +15%.

In addition to valuation concerns that may limit a near-term rally in Tesla, other challenges may hold the stock back.  In China, persistent supply-chain shortages across the automotive industry may limit auto production.  Also, high raw material costs may begin to eat into company profits.  Finally, CEO Musk’s litigation with Twitter might weigh on any exuberance driven by a stock split.  Still, Tesla’s strong popularity with retail investors could spark a sustained rally in the stock with the demonstrated firepower that retail investors have shown with meme trading.

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