Electric vehicle (EV) behemoth, Tesla TSLA recently completed a 3-for-1 stock split, making its shares more attractive to retail investors. Is the stock worth a buy now post the split at its current price levels of around $280 a piece?
When Tesla last split its stock in August 2020, shares skyrocketed, thanks to an influx of new buyers and increased liquidity. Shares have been on a massive run since then, with the company joining the elite $1-trillion club in October 2021. The stock had become quite expensive for investors who were a little tighter on the budget, grinding down the overall trading volume and driving away potential investors. Noting the steep price tag of Tesla shares, the company again decided to split its stock, making its shares more affordable. In June 2022, TSLA announced that its board approved a three-for-one stock split, subject to shareholder approval at the company’s annual meeting on Aug 4.
Stock splits have actually gained massive traction over the past few years. It’s one of the more positive announcements that shareholders can receive. Besides Tesla, we’ve witnessed several market titans undergo a stock split so far in 2022, including Amazon AMZN and Alphabet GOOGL.
Amazon announced its 20-for-1 split back in early March, representing the company’s first split since 1999. Needless to say, it shocked the market. The split went into effect a few months later, on Jun 6.Back in February, Alphabet announced its plans to split its stock 20-for-1. Like AMZN, buyers came out in full force for GOOGL shares. Alphabet shares started trading on a split-adjusted basis on Jul 18.
Of course, a stock split doesn’t affect a company’s market capitalization. However, it lowers the price of each share, providing ease for the stock price to multiply once again and offering investors with sizable gains.
Coming back to Tesla, we believe that the company has a host of potential catalysts surrounding it, which makes it an attractive buy now.
Over the years, EV maker Tesla has evolved into a dynamic technology innovator. It is the market leader in battery-powered electric car sales in the United States, with roughly 70% market share. The company’s flagship Model 3 is the best-selling EV model in the United States. Model Y has also gained immense popularity.
The automaker is riding on the robust demand for Models 3 and Y, which form a major chunk of its total deliveries. Deliveries of Model 3/Y witnessed a CAGR of more than 74% between 2019 and 2021. Musk remains optimistic about meeting the average annual deliveries growth target of 50% over a multi-year horizon. Production ramp-up at gigafactory 4 (in Berlin) and 5 (in Austin) and introduction of new models, including Semi and Cybertruck from next year, are set to support deliveries growth.
High volumes are aiding Tesla in achieving cost and production efficiencies, thereby strengthening margins. While the temporary decline in Shanghai production volume resulted in a sequential fall in gross margins in the last reported quarter, the metric is likely to show improvement in the second half of 2022.
Tesla posted the sixth straight earnings beat in the last reported quarter. Even in the face of harsh business conditions, the company’s top and bottom lines in the second quarter grew 41.6% and 56.5%, respectively.
The company has had zero issues with generating serious revenue growth. Since 2016, Tesla’s annual revenue has soared 668%. TSLA has managed to grow its annual revenues by double-digit percentages each year since 2012. Thanks to strong deliveries and a rise in the average selling price of vehicles, we believe Tesla would maintain its upward trajectory in automotive revenues.
Tesla’s energy generation and storage revenues are also growing, thanks to the positive reception of Megapack and Powerwall products. The efforts to strengthen its balance sheet are also praiseworthy. Simply put, Tesla seems to be firing on all cylinders.
For the current fiscal year (FY22), the EV titan is projected to generate $85 billion in revenues, implying a double-digit uptick of nearly 58% year over year. In FY23, the top line is forecast to rise by an additional 41%.
The Zacks Consensus Estimate for FY22 earnings per share is pegged at $3.73, suggesting year-over-year growth of 65%. The bottom line is projected to increase another additional 35.5% in FY23.
While Tesla continues to look grossly overvalued, its share price has anyway long been divorced from the company’s fundamentals. As an auto manufacturer delivering roughly a million cars per year, it would need to increase production by 16 times to reach fair value. But then again, Tesla is not just any other auto manufacturer but also a battery/software developer, a solar tech company and an innovation powerhouse. In fact, TSLA is often labeled by many as a tech company.
Tesla’s innovative engine, brand value and growth prospects are way better than other companies in the same space. So even as the EV market gathers momentum with competition heating up, Tesla looks set to remain a leading player.
So, with its shares being well below its all-time highs post stock split, TSLA is worth scooping up now for long-term gains. For investors who can swallow elevated valuation levels and are looking for companies with robust growth prospects, Tesla should be on the top of their list.
Tesla currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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