There's rarely a dull moment in the stock market. Even in the current year, when major indexes like the S&P 500 and the Nasdaq-100 have dipped into bear market territory, some large technology companies were able to generate some investor enthusiasm by conducting stock splits.
The companies include Amazon, Shopify, and most recently, Google parent Alphabet. The next in line is electric-vehicle powerhouse Tesla (TSLA -1.36%). Its investors just approved a 3-for-1 stock split, which is set to take effect at the close of trading on Aug. 24.
The split adds no real value to Tesla as a company. It just divides up the shares of the same pie into smaller pieces. Instead, CEO Elon Musk recently unveiled some plans that could actually make its stock worth buying right now.
What the stock split is and what it isn't
When companies create a large amount of value for shareholders, their stock price often rises to the point that it costs hundreds or even thousands of dollars to purchase a single share. As of this writing, Tesla stock trades at a price of $864.51, which might put it out of the range of some retail investors who don't have access to fractional shares. Hence, the company has opted for a 3-for-1 split.
It means that come Aug. 24, existing Tesla stockholders will receive two additional shares for each one they already own, and the price of each share will be reduced in proportion. For example, if the stock split took effect today, Tesla's price per share would shrink from $864.51 to $288.17.
These moves typically draw a positive reaction because of the perception that more investors will rush to buy in once the stock is more accessible to smaller participants. But it's worth remembering the upcoming stock split will add no intrinsic value to Tesla as a company, so it's not a long-term reason to buy.
But Tesla does offer plenty of good reasons to buy its stock
Tesla is the global leader in electric vehicle sales, and its edge is set to expand thanks to the company's two new gigafactories in Austin, Texas, and Berlin, Germany. They're on track to nearly double Tesla's annual production capacity to 2 million vehicles by the end of 2022.
But at the company's annual meeting earlier this month, Elon Musk spoke about plans to ramp Tesla's production capacity up to 20 million electric vehicles per year by 2030, which could involve building 10 or 12 brand-new gigafactories. It's an ambitious target, but the company did produce just 35,000 vehicles in 2014, which means it has grown production capacity 57-fold in the last eight years. What's another eightfold increase over the next eight years?
Tesla has arguably the most innovative production processes in the entire car manufacturing industry, and it has even drawn praise from the former CEO of the company's main rival, Volkswagen Group. It has allowed Tesla to maintain an extremely high gross profit margin, which peaked at 32.9% in the first quarter of 2022 and has steadily climbed alongside its production numbers over the last few years.
The figure dipped to 27.9% in the more recent second quarter because of COVID-19 lockdowns in China that shut down Tesla's Shanghai factory, plus supply chain headwinds, which triggered a 15% decline in the number of cars Tesla was able to make. It produced 258,580 vehicles in the second quarter compared to 305,407 in the first quarter, but the recent challenges are likely short-term in nature.
Tesla has become a profit-generating machine
A higher gross margin means more money flows through to Tesla's bottom line, and over the last 12 months, the company has generated $9.5 billion in net income on $67.1 billion in revenue.
That's a 336% increase in net income compared to the prior 12-month period, and the result has helped Tesla build an $18.3 billion cash pile which could go toward funding its continued expansion.
Tesla has grown into more than just a car manufacturer and is making strides in residential solar generation and storage, to the point where it simply can't produce batteries fast enough to keep up with soaring demand. This puts Tesla on a path to becoming a true green-energy company.
Investors are pricing a lot of future growth into Tesla stock. It currently trades at a price-to-earnings multiple of 104, which is nearly four times higher than the 26.8 multiple of the Nasdaq 100 technology index. But Tesla is a long-term story and its growth rate, particularly in net income, warrants a premium to the broader market.
So long as investment horizons are aligned with the company's 2030 plan to produce 20 million vehicles per year, there's a good chance of generating significant gains by holding Tesla stock.