Tesla (TSLA 14.50%) is planning a 3-for-1 stock split, according to a recent filing with the Securities and Exchange Commission (SEC). Of course, the company still needs to obtain the approval of shareholders -- the measure will be put to a vote at the annual meeting on Aug. 4 -- but many investors are already excited about the implications.
While stock splits have no direct impact on business performance, they do reduce the price of each share, which makes the stock more accessible to retail investors. That occasionally translates into price appreciation, simply because new investors start buying. And with Tesla down 42% from its high, a post-split rebound probably sounds pretty good to shareholders.
Unfortunately, stock splits don't always trigger price appreciation, and there are several other variables at play.
Tesla is facing headwinds
Tesla was firing on all cylinders in the first quarter. Despite supply chain disruptions and the rising cost of materials, the company still managed to grow vehicle production and deliveries by 69% and 68%, respectively. In turn, Tesla once again topped the market in terms of electric car sales, capturing a 15.5% market share.
That led to stellar first-quarter financial results. Revenue skyrocketed 81% to $18.8 billion, operating margin expanded more than 13 percentage points to 19.2%, and GAAP earnings soared more than sevenfold to $2.86 per diluted share. So why is the stock down?
The market tends to be forward-looking, and investors are worried about what they see on the horizon. First, pandemic-related lockdowns in China resulted in a 22-day closure at Gigafactory Shanghai, and 18 of those days fell in the second quarter.
Second, supply chain issues slowed the reopening of Gigafactory Shanghai, with production falling as low as 200 vehicles on at least one day in May, according to Reuters. For context, Tesla churned out about 1,200 vehicles per day in China in late April. Collectively, those issues may result in lower-than-expected production numbers for the second quarter.
More broadly, many would-be buyers might delay purchasing a new car in the current macroeconomic environment. Rising interest rates make auto loans less attractive, and rampant inflation has already led Tesla to raise its vehicle prices several times this year. In the near term, those headwinds could put downward pressure on Tesla's share price, especially if the company fails to impress Wall Street with its second-quarter results.
Countless variables factor into a stock's price at any given moment, which makes it virtually impossible to forecast short-term price action. More importantly, splitting a stock is like cutting a cake. The number of slices has no impact on the desirability of the cake, and the number of shares has no impact on the value of the company.
That being said, patient investors should consider picking up a few shares of Tesla right now.
Tesla has an ambitious vision
Tesla has made tremendous progress in terms of manufacturing efficiency. The company posted an industry-leading operating margin of 14.6% in the third quarter of 2021, and that figure has only gone up from there. Better yet, Tesla is well-positioned to maintain or even improve its efficiency in the coming years.
Image source: Tesla
The company recently began outfitting the Model Y with 4680 battery cells, a proprietary product that promises to reduce production costs by 56% and boost range by 54%. That's especially impressive because Tesla already pays less than any other automaker to build its current battery packs, and battery packs are the most expensive part of an electric car. In other words, Tesla is working to reinforce its cost advantage.
The company is also ramping production at the new Gigafactories in Austin, Texas, and Berlin, Germany. Those efforts will likely drag on margins in the near term, but a European presence should reduce logistics costs and make Tesla more profitable in the long run.
However, Tesla's greatest source of profitability will eventually be full self-driving (FSD) technology, according to CEO Elon Musk. Tesla has a robotaxi slated for production in 2024, and it plans to start an autonomous ride hailing platform once its FSD software is ready for action.
For context, Ark Invest believes autonomous ride hailing platforms will generate $2 trillion in annual profits by 2030. Of course, that number is theoretical at this point, but it supports Musk's assertion that FSD will be the long-term profit driver.
Tesla currently trades at 96 times earnings, an outlandish valuation when compared to other automakers. But if the company successfully executes on its ambitious vision, the current share price may look like a bargain a decade down the road. For that reason, I think it's OK to buy this growth stock right now.
