Shares of Tesla (TSLA +0.91%) will soon start trading on a split-adjusted basis, making the stock more accessible to investors who weren't willing to shell out around $2,000 for a single share. On Monday, the electric-car maker's shares will begin trading on a 5-for-1 basis.
With a stock split just days away, many investors are likely interested in buying shares of the electric-car maker. More importantly, some investors may be wondering whether it makes more sense to buy the growth stock before or after Tesla stock starts trading on a split-adjusted basis.
Is the stock more likely to go up or down after shares split?
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Stay focused on the business -- not the upcoming stock split
Based on the way Tesla stock has traded since its stock split announcement earlier this month, investors may be tempted to think that buying the stock ahead of its split on Monday makes the most sense. After all, shares have already risen 35% since the stock split was announced on Aug. 11.
But the reality is that it's impossible to know how Tesla shares will trade leading up to (or after) the upcoming stock split. Sure, recent exuberance in the market for Tesla shares has likely been driven, in part, by excitement about the upcoming stock split. But there is no rational reason for investors to bet on a stock simply because of a stock split, as a stock split does nothing to make Tesla shares more valuable.
All that will happen in Tesla's stock split is a fivefold increase in total share count. Each share, however, will represent one-fifth of the ownership in the electric-car maker that it did previously. Put another way, shareholders will have five times the shares in their account after the split but the total value of those shares will equal their combined pre-split value.
Don't speculate
With all this in mind, investors should base any investment decision on their long-term expectations for Tesla's underlying business and the stock's current valuation relative to those views. Therefore, if you believe the stock is worth more than its $393 billion market capitalization at the time of this writing, consider buying the shares based on that belief. But don't buy shares based on a speculative bet on how the stock will trade leading up to or following the stock split.
Of course, some investors may be convinced that there will be a bump in demand for Tesla shares when they become more affordable after their split. Keep in mind, however, that the market is forward-looking; if you're predicting this will be the case, you're likely not the only one thinking this. The Street may have already priced in an expected boost to demand by bidding up shares, and some investors may be standing by ready to sell if the stock becomes overvalued based on their estimate of its underlying business value.
It's simply impossible to know how Tesla shares will trade in the coming days. If you are interested in buying Tesla stock, do so based on your long-term view for the automaker's business potential.
Is Tesla stock a buy?
Nevertheless, investors are likely still wondering: Is Tesla stock a good buy at this level?
After soaring 900% over the past 12 months, the automaker's valuation is becoming increasingly difficult to justify. Despite boasting a market capitalization that is closing in on $400 billion, the automaker's trailing-12-month free cash flow is less than $1 billion. Furthermore, while Tesla's vehicle deliveries are growing quickly and are likely to continue rising, the automaker is only expected to deliver 500,000 vehicles this year. Compare that to the approximately 2.5 million vehicles BMW sells annually, despite BMW's market cap being less than $40 billion.
While Tesla's execution recently has been impressive, from last year's rapid factory construction launch in China to an earlier-than-expected Model Y launch this year, investors should consider the stock's wild valuation carefully before buying shares.
