Tesla (TSLA 5.42%) is one of the most highly publicized and widely followed companies on Wall Street. Most investors have an opinion regarding the company and its enigmatic CEO Elon Musk, ranging from blisteringly harsh to wildly enthusiastic -- and everything in between. There's no arguing, however, that Tesla has changed the way the public at large views electric vehicles (EVs), becoming the industry leader in the process.
The company isn't known for being a wallflower, attracting attention to its achievements and frequently making headlines. So it shouldn't come as a surprise to investors that Tesla is breaking with convention and considering another stock split, less than two years after the company's first splitting of its shares.
Investors considering buying Tesla stock or adding to an existing position are faced with an interesting conundrum: Should they buy shares now, or wait until after the stock split?
Image source: Tesla.
Buy now, or wait for the split?
Tesla last split its shares in 2020, recently enough to provide insight into whether investors should buy the stock now or wait until after the split. A pattern has emerged in recent years that seems particularly pronounced with well-known and highly followed stocks, as noted by my friend and Motley Fool colleague Dan Caplinger:
- From the time of the announcement until split-adjusted trading began, the stock price tended to surge, outpacing the overall market.
- Immediately following and several days after the stock split there could be additional stock price gains.
- Shortly after the split, the stock tended to continue the trajectory it was on before the announcement of the stock split.
Tesla varied somewhat from that pattern. From the time of its stock split announcement to its completion, shares surged 81%. However, during the eight days following the split, Tesla shares slumped more than 30%, before rebounding and beginning a relentless climb higher.
In fact, from the date of the stock split announcement in early August through the end of 2020 -- a period of about five months -- Tesla shares gained nearly 157% overall. It wasn't all wine and roses, however. Investor enthusiasm didn't insulate the stock from the occasional downturn, as shares have fallen by 25% or more on five separate occasions since the stock split was announced. The lesson here is that investor psychology alone isn't enough to propel a stock higher over the long term.
NASDAQ: TSLA
Key Data Points
What's different this time is that Tesla has telegraphed to investors its intent to initiate another stock split. At this point, we don't yet know the timing of the split or what the ratio for the split will be. That information will likely be available as soon as Tesla releases a proxy statement in advance of its annual meeting, since the move to increase the share count will require shareholder approval.
That means investors still have time to get a jump on the stock in advance of the full announcement -- but should they?
Image source: Getty Images.
It depends
As with so many things, the answer to this question is "it depends." If you aren't interested in being a Tesla shareholder, the mere announcement of a pending stock split shouldn't be a reason for you to invest.
If you are interested in becoming a Tesla shareholder, the decision is largely dictated by your personal circumstances and the limitations set by your broker. Tesla shares are currently priced at roughly $1,100 per share (as of this writing). If you have sufficient capital to lay out for one or more full shares of Tesla stock, there's no reason not to add to a position or start a new one now.
For those who don't have that much cash to invest, some brokers permit the purchase of fractional shares, buying some portion of a full share depending on how much money you have to invest. If your broker doesn't have a provision for trading fractional shares, you can simply wait until after the stock split in the hopes that the split-adjusted price is more in line with your budget.
Reasons to be bullish
Investors need only review Tesla's recent results for evidence that the stock is a buy. The company announced record deliveries in the fourth quarter, with 308,600 vehicles, which vastly outperformed analysts' consensus estimates of 267,000. The full-year numbers were equally impressive, with 936,172 deliveries, well ahead of expectations of 897,000.
Robust production and deliveries sparked sterling financial results, as fourth-quarter revenue of $17.7 billion surged 65% year over year. At the same time, operating expenses grew just 50%, dropping more profit to the bottom line and driving adjusted net income to $2.88 billion, up 219%. Expanding profit margins are a clear indication that Tesla has achieved scale.
Recent developments suggest this could be just the beginning. Last year, Tesla said it expects to achieve 50% annual growth in vehicle deliveries "over a multi-year horizon," a forecast it reiterated in its most recent quarter. With both the Berlin Gigafactory and the Texas Gigafactory coming online, Tesla has the production capacity to make that outlook a reality.
Given the ongoing demand for its industry-leading EVs, its increasing manufacturing capability, and its robust financial results, it doesn't really matter whether you buy Tesla stock now or wait until after the split. Just as long as you buy it.
