The stock market has given investors a bumpy ride in 2022, particularly for those invested in the technology sector. The Nasdaq 100 index is down 19% year to date, but it has declined over 20% from its all-time high set in December 2021. That places it in bear market territory.
Some large companies have turned to unconventional methods to buoy their stock prices amid the volatility. Tesla (TSLA -3.55%) is one of a handful that has elected to split its stock in a bid to make it more attractive to smaller investors. While the move doesn't add any value to the underlying company, Tesla's recent operational performance certainly does.
Image source: Tesla.
Stock splits are mostly cosmetic
Tesla stock trades at a price of roughly $1,000 per share right now. In theory, smaller investors will avoid a stock with a high price because it's expensive to purchase a single share, and it could make up a disproportionate percentage of their portfolios. So by splitting the stock, it reduces the price and therefore makes it more accessible to retail investors.
When Tesla announced plans to split last month, its stock jumped over 8% on the day. While a stock split is purely cosmetic and makes the company no more valuable, the belief is that more money will flow into Tesla shares because more investors can afford to buy it.
It's not the first time Tesla has done this. In August 2020, it conducted a 5-for-1 stock split reducing its price per share from $2,225 to $445, giving existing investors five shares for each one they already owned. Since then, Tesla stock has more than doubled, but it's almost entirely due to the company's excellent business results.
Tesla is reaping the benefits of scale
Last week, Tesla announced its earnings results for the first quarter of 2022. The company continued to show growth in vehicle deliveries, and that spurred an increase in revenue and profit.
There's an interesting relationship between the number of cars Tesla sells and profitability. By producing more, the company's fixed costs become a smaller portion of the overall revenue base, which lifts gross profit. Over the last two years, Tesla's quarterly vehicle deliveries have more than tripled, resulting in an increase in the company's automotive gross profit margin to 32.9% from 25.5%.
This concept is often referred to as scale.
Thanks to climbing deliveries, Tesla's revenue jumped by 87% in Q1 2022 to $16.8 billion. And a higher gross profit margin resulted in more money flowing through to the bottom line, sending Tesla's earnings per share soaring by 633% to $2.86 for the period.
Tesla has built a leadership position in the manufacturing of electric vehicles, with the most technologically advanced process in the industry. It's another way Tesla is able to maintain such high-profit margins, which are now more than double that of competitors like Ford, which posted a gross margin of 15.9% at the end of 2021.
Tesla's diversity makes it a forever stock
Tesla's business isn't just about electric cars but also green power generation and battery storage to serve other purposes. The company's innovative solar roof, for example, could grow to become a staple of new homes in the future as the cost of the technology comes down over time. It could save consumers thousands of dollars each year on their electricity bills.
Further, Tesla says demand for its Powerwall battery, which stores solar energy in residential houses, is far exceeding the company's production capacity. It's opening a dedicated facility specifically to address this, yet in Q1 2022 it still managed to grow deployments by 90% compared to the same period last year.
As Tesla unlocks significantly more manufacturing capacity for its electric vehicles through its new gigafactories in Texas and Berlin, the other initiatives in its product arsenal could begin to receive greater investment and more attention.
Tesla is a driving force in all of these innovative areas, and in many cases, it's years ahead of the competition. Its rapid growth rates suggest that's not changing anytime soon, and while the coming stock split won't add any real value, it provides an opportunity for the smaller investors out there to pick up a few shares.
