Apple and Tesla Stock Splits Are Here: Should You Buy the Stocks Now?

Few predicted how sharply Apple and Tesla stocks were about to surge when the two companies recently announced plans to split their stocks. Since Apple's stock split announcement on Jul. 30, shares have jumped 30%. Tesla stock has soared an incredible 61% since its stock split announcement on Aug. 11.

With such big gains, investors interested in these stocks have good reason to reevaluate whether they are still attractive at these higher levels. After all, many new investors are likely considering buying Apple and Tesla stock now, as each of the companies' stocks will start trading on a split-adjusted basis on Monday. The two stocks will be available at much more affordable prices than they were last week. Let's take a closer look. 

Image source: Getty Images.

Understanding Apple and Tesla's stock splits

What will Apple and Tesla's stock splits look like on Monday? While we won't know the exact prices that both stocks will trade at on a split-adjusted basis, we can make a rough estimate based on where the two stocks closed the trading day on Friday.

The stock splits will likely look something like this:

Closing price data source: Yahoo! Finance. Calculations represent the author's rough estimate of how Apple and Tesla shares will trade on Monday following their stock splits.

Of course, investors should note that a stock split doesn't make shares a better buy than they were before. Sure, they may be cheaper, but each post-split share has only a fraction of the company's pre-split ownership assigned to it. For Apple, four post-split shares will combine to equal the ownership that one share had before the split. For Tesla, it will take five shares after the split to have the same ownership in the company that one share of the electric-car maker was allotted before the split.

Even so, many investors who weren't willing to shell out $500 per share for the tech giant are likely now interested in whether Apple stock is a good buy today, as its shares are now much more affordable. The same goes for Tesla investors, who will now be able to get their hands on the stock at a fifth of the price they would've paid before the stock split.

Let's explore if either stock is attractive today.

Is Apple stock a buy?

With a $2.1 trillion market capitalization, Apple has certainly proven itself to the market. The company's massive iPhone business continues to perform well. Apple also has two major catalysts for growth: its services and wearables businesses. Further, the company's resilience through the coronavirus pandemic has impressed investors. Apple reported double-digit revenue growth (up 11% year over year) in its fiscal third quarter. Earnings per share grew even faster during the period, rising 18%.

Image source: Apple.

Investors are particularly intrigued by Apple's strong cash flow. Trailing-12-month free cash flow, or cash from operations less capital expenditures, is about $72 billion, partly justifying Apple's valuation.

Still, investors should note that there is currently very little margin of safety built into Apple stock's price. With a price-to-earnings ratio of 38, the tech stock's valuation already prices in years of more strong, double-digit earnings-per-share growth similar to levels seen in fiscal Q3.

While Apple stock doesn't seem overvalued today, it also doesn't look like a particularly attractive buy at its current valuation.

Is Tesla stock a buy?

If you thought Apple stock's valuation looked expensive, Tesla's valuation is out of this world. The company currently has a market capitalization of $413 billion despite reporting trailing-12-month free cash flow of just $800 million. What about Tesla's price-to-earnings ratio? It's at 1,145 today.

Image source: The Motley Fool.

Of course, the big difference between Tesla and Apple is the electric-car maker's growth prospects. On average, analysts expect Tesla's revenue to jump 38% in 2021 -- and that would be on top of a projected 21% bump to the automaker's top line in 2020. The consensus analyst estimate for Tesla's bottom line is even more extraordinary. As the company achieves greater economies of scale and flexes its operating leverage, analysts expect that Tesla's adjusted earnings per share will rise from $0.20 in 2019 to $8.72 in 2020 and $15.65 in 2021.

Further, Tesla is only at the tip of the iceberg in terms of market opportunity. The automaker is expected to sell only 500,000 vehicles this year -- and global electric vehicle sales from all auto manufactures are anticipated to come in at about 1.7 million, according to BloombergNEF. Meanwhile, global auto sales, including all types of vehicles, are expected to be about 70.3 million in 2020. Tesla's addressable market is huge, to say the least.

Nevertheless, it's becoming increasingly difficult to rationalize Tesla stock's valuation. In order to make its stock a buy at these levels, the company will need to continue growing electric vehicle sales at rates of around 25% to 35% annually over the next five to 10 years while also succeeding in more speculative areas like self-driving and the launch of an autonomous ridesharing network -- two areas in which Tesla eventually hopes to lead.

But given how uncertain these outcomes are, investors should proceed with caution when it comes to buying the stock at this level. If vehicle delivery growth decelerates meaningfully, or if management's speculative forays into self-driving vehicles and ridesharing don't pan out, Tesla shares could prove to be significantly overpriced today.