This has been one of the most trying years in decades for Wall Street. The benchmark S&P 500, which is typically viewed as a barometer of Wall Street's health, produced its worst first-half return since 1970. Were this not enough, inflation hit a more than 40-year high in June, and U.S. gross domestic product has retraced in back-to-back quarters, which raises the likelihood of a recession.
While things have certainly not gone Wall Street's way in 2022, the investing community has still managed to find a bright light amid a gloomy situation. This proverbial bright light is none other than stock splits.
Image source: Getty Images.
A "stock split" is what allows a publicly traded company to alter its share price and outstanding share count without affecting its market cap or operations. Forward stock splits help reduce the share price of a stock, while a reverse stock split can increase a publicly traded company's share price. Forward stock splits are what usually get investors excited, because a company wouldn't be enacting a split if it weren't executing well and out-innovating its competition.
Out of the more than 200 stock splits announced and enacted through the first eight months of the year, arguably none has been more anticipated than that of electric vehicle (EV) manufacturer Tesla (TSLA 3.23%). The world's most valuable automaker announced its intent to conduct a split in June, and with shareholder approval, it moved forward with a 3-for-1 stock split on Aug. 25, 2022.
With the Tesla stock split now complete, here are five things investors should know following this much-anticipated split.
1. Tesla's stock is now a lot friendlier to everyday investors
To begin with, Tesla completing its second stock split in as many years is a boon to everyday investors who don't have access to fractional share purchases with their online broker. In the blink of an eye, Tesla's share price adjusted from close to $900/share to a little less than $300/share. In other words, investors wanting to take a stake in Tesla can now do so with a considerably smaller amount of money.
It's worth noting that Tesla's retail investor following is quite vocal on social media message boards, and the company's CEO, Elon Musk, knows it. Nominally reducing Tesla's share price is an easy way to keep these everyday investors engaged.
2. The company's growth strategy hasn't changed
One of the most important things to recognize about forward and reverse stock splits is that they have no effect on the operating performance of a publicly traded company. Adjusting the share price and outstanding share count amounts to window dressing.
Following its split, Tesla's growth strategy remains unchanged. This is a company focused on ramping up production at its Austin, Texas and Berlin-Brandenburg gigafactories, which were brought online earlier this year, as well as bringing new innovations to reality. Elon Musk's forecast calls for the Cybertruck and Semi to enter production in 2023, and for the robotic humanoid Tesla Bot to make its debut sooner than later.
To add, stock splits have no effect on a company's income statement or balance sheet, either. Tesla's cash position, net income, and fundamental metrics, such as price-to-earnings ratio, are the same with its share price below $300 as they were when its stock traded near $900.
TSLA Percent of Float Short data by YCharts.
3. Short interest is at historic lows
Although Tesla has been known to divide the investing community into die-hard optimists and feet-on-the-ground skeptics, it's worth pointing out that Tesla's stock split kept the pessimists firmly on the sidelines.
One of the easiest ways to gauge the investor sentiment of a publicly traded company is to examine the percentage of float held short. A "short-seller" is someone who benefits when the price of a security declines. Put simply, the higher the percentage of shares held short, relative to the tradable float, the more negative the perception of the company.
As of Aug. 15, just 2.35% of Tesla's float was held by short-sellers. This is the lowest short float percentage dating back to when Tesla became a public company in 2010. If there's a key takeaway from this figure, it's that Tesla's share price is predominantly being driven by buyers and sellers -- not short-selling or short-covering.
TSLA PE Ratio data by YCharts.
4. Tesla's shares are still incredibly pricey
The fourth thing to note, following the completion of the Tesla stock split, is that the company remains exceptionally expensive, compared to legacy auto stocks.
As noted, stock splits have no effect on key fundamental metrics. When the closing bell tolled on Aug. 30, Tesla was valued at more than 52 times Wall Street's consensus earnings forecast for 2023, had a nosebleed multiple of 70 times expected earnings per share this year, and was lugging around a trailing-12-month price-to-earnings ratio of more than 100.
Although Tesla does bring added diversification to the table -- the company installs solar panels and provides energy storage solutions -- and is the clear North American EV production leader for the moment, it operates in an industry where single-digit forward price-to-earnings ratios are the norm.
Legacy automakers like General Motors and Ford Motor Company can be purchased for respective multiples of six and eight times Wall Street's forward-year forecast earnings. These are companies with rich histories and strong brand awareness that are investing tens of billions of dollars to roll out new EVs and develop autonomous vehicles.
In short, Tesla's stock split doesn't remove the questions concerning its valuation.
Elon Musk at the Shanghai gigafactory groundbreaking ceremony. Image source: Tesla.
5. Elon Musk remains the company's greatest risk/liability
Fifth and finally, the completion of the Tesla stock split does nothing to hide the company's biggest liability: Its own CEO.
Though Musk is viewed as a visionary, and is potentially inseparable from Tesla, when examined from an investment standpoint, he brings a slew of legal, financial, and operating risks to the table that could quickly deflate his company's premium valuation. For instance, Musk's possible acquisition of social media platform Twitter represents the latest in a long history of questionable decision-making by a CEO who should be focused on the world's most valuable auto brand.
But the far bigger worry here is that Musk's forward-looking statements, which play a key role in buoying Tesla's pricey valuation, have a history of missing the mark. The Tesla stock split doesn't change the fact that Musk's empty promises could come back to bite shareholders.
