Several prominent companies initiated stock splits this year. While the stated reasons for doing so varied, it's likely that the companies (at least partly) hoped to make their shares more attractive to investors.
A stock split is mostly a cosmetic move that doesn't alter the fundamentals and prospects of the company executing the split. But some believe that such a move encourages interest in the stock because the share price is more affordable to a wider pool of retail investors.
Electric vehicle (EV) maker Tesla (TSLA 2.49%) was one of those prominent companies initiating a split this year, opting for a 3-for-1 split that took effect on Aug. 25. What investors following this stock need to know though is that the split isn't the reason this stock is worth buying. Tesla is capable of doubling investors' money in the long run regardless of any split, as it is on track to win big from fast-growing markets.
Let's look at the reasons why this stock-split play could make investors a fortune even though the reasons have nothing to do with the stock split.
EV dominance could help Tesla maintain its impressive growth
Tesla's stock price is down 17.2% so far in 2022. Over the past five years, however, the company has given investors' portfolios a massive boost, with gains of over 1,100%. It has the potential for big gains over the next five years as well as it operates in the fast-growing electric vehicle (EV) market.
In the U.S., Tesla controlled about 68% of the EV market in the first half of 2022. Tesla's Model Y and Model 3 have left others far behind so far in 2022, with combined deliveries of 200,000 units. The next closest competitor is Ford Motor Company's Mustang Mach-E, which has sold just over 18,000 units.
Tesla's dominant position in the U.S. EV market could pave the way for terrific long-term growth. That's because the EV market in the U.S. is forecast to clock annual growth of 25% through 2028, hitting $137 billion in revenue at the end of the forecast period. Tesla could take a huge chunk out of this market if it can manage to hold on to its impressive share.
Of course, that's going to be difficult with new EVs coming into the market from both established manufacturers and new players. But it is worth noting that Tesla is busy ramping up its production capabilities to make the most of the end-market opportunity. In the second quarter, Tesla reported a production capacity of 900,000 vehicles from its California and Texas factories, a nice jump from the prior-year period's capacity of 600,000.
What's more, the company's global production capacity was up to nearly 2 million units in the second quarter, compared to just over 1 million units in the year-ago period. This rapid capacity expansion should help Tesla take advantage of the global growth in EV sales, and help it achieve its long-term ambition of achieving 20 million annual global vehicle deliveries by the early 2030s.
As such, it wouldn't be surprising to see Tesla maintain its healthy growth in the long run and grow its revenue at an impressive pace as consensus estimates suggest.
TSLA Revenue Estimates for Current Fiscal Year data by YCharts
Can Tesla's stock price double?
Analysts forecast Tesla's earnings to grow at a compound annual rate of 45% over the next five years. It wouldn't be surprising to see the company clock such terrific growth, as the discussion above indicates.
Assuming Tesla's bottom line grows at the estimated rate over the next five years, its earnings per share could increase to $27.37 by the end of 2027. Now, Tesla is trading at an expensive 51 times forward earnings, which is significantly higher than the auto industry's forward price-to-earnings (P/E) ratio of 28.
Of course, Tesla deserves a richer multiple thanks to its rapid growth. The company's total revenue was up 42% year over year in Q2 to $16.9 billion, while adjusted earnings shot up 57% to $2.27 per share. But even if we assume that Tesla trades at 28 times forward earnings after five years, its stock price would come to $766. That would be significantly higher than Tesla's current stock price around $293, which also means that this EV stock could more than double in price over the next five years.
