When it comes to new technologies with explosive growth potential, none have garnered quite as much enthusiasm as electric vehicles. Not only are they an essential part of a clean energy future, but industry leader Tesla (TSLA 12.06%) is proving it can produce them at higher profit margins compared to manufacturers of combustion engine vehicles. It's a win-win for stockholders.
Ark Investment Management CEO Cathie Wood, who directs a series of innovation-focused exchange-traded funds (ETFs), is one of the biggest Tesla bulls on Wall Street. Tesla stock is the largest holding in the Ark Autonomous Technology and Robotics ETF, the second-largest holding in the Ark Innovation ETF, and the fourth-largest holding in the Ark Next Generation Internet ETF.
Image source: Tesla.
Combined, the funds own over 1.3 million shares of Tesla worth $911 million at the current price. That holding has declined from a high of around 5.6 million shares amid the broader tech sell-off, which prompted Wood to cash in some earlier gains. But thanks to Tesla's upcoming stock split, Ark is about to own millions of additional shares.
Tesla proposes a 3-for-1 stock split
When a company generates high amounts of growth, its stock price can soar to the point that it appears expensive for retail investors who are deploying small amounts of money.
Right now, it costs about $656 to purchase a single share of Tesla, so the company has proposed a 3-for-1 stock split, which would multiply the number of shares in circulation by three, and organically shrink its stock price by two-thirds, to roughly $218.67.
Current stockholders, like Wood's Ark funds, would receive three shares at the reduced price in exchange for each one they currently own. The overall value of the holding will remain exactly the same; in essence, stock splits are purely cosmetic and add no intrinsic value to the underlying company.
Tesla isn't alone. E-commerce giant Amazon just completed a 20-for-1 split, and Google parent Alphabet has a 20-for-1 split due to take effect on July 15.
Buy Tesla for the business case
No date has been set yet for the upcoming stock split, and while it will add no value anyway, Tesla's operational success certainly does. The company is the top seller of electric vehicles worldwide with over 1 million deliveries in the last 12 months, and it has drawn praise from the CEO of key competitor Volkswagen Group for its highly productive manufacturing processes, which are levels above the rest of the industry.
Tesla has produced an automotive gross profit margin that is the envy of other carmakers. Its most recent margin in the first quarter of 2022 was more than double that of rival American car manufacturer Ford Motor Company, for example. As Tesla continues to scale up production with new gigafactories coming online in Texas and Germany, the figure could get even better.
Everything else being equal, a high gross profit margin results in more money flowing through to the bottom line in the form of earnings per share. Earnings are simply the company's net income divided by the number of shares outstanding, and in Q1 2022, the figure jumped 633% year over year at Tesla.
Once the 3-for-1 stock split takes effect, investors will need to divide Tesla's past earnings-per-share figures by three to adjust for the extra shares in circulation. For financial statements released after the split, the company will do that.
Cathie Wood predicts 560% upside in Tesla stock
Despite the recent tech sell-off, which has pushed Tesla stock down almost 47% from its all-time high, Wood is as bullish as ever over the long term.
Tesla does face some near-term challenges relating to supply chain issues and tougher economic conditions, which could dampen the demand for expensive purchases like cars.
But in April, Ark updated its Tesla modeling and revealed a price target of $4,600 per share by 2026 (or $1,533.33 per share after the stock split), a 560% upside from where Tesla stock trades today.
Ark also has an extreme bull case scenario, where Tesla stock could jump 732% to $5,800 ($1,933.33 post-split). This assumes the company sells 17 million cars in 2026, and that Tesla's future self-driving robotaxis make up a significant chunk of revenue. These are slated for production beginning in 2024.
But even Ark's bearish case of $2,900 per share ($966.66 post-split) is strong, as it still points to 316% growth from the current price.
While some of those figures can make your head spin, it's worth noting that Tesla has delivered a return of over 18,000% since it listed on the public markets in 2010. In other words, a $10,000 investment back then would be worth north of $1.8 million today, assuming you held on.
