It's been quite the year on Wall Street. Since hitting their respective all-time highs less than a year ago, the iconic Dow Jones Industrial Average, benchmark S&P 500, and tech stock-driven Nasdaq Composite have plummeted by as much as 22%, 26%, and 35%, respectively. With declines of this magnitude, all three stock indexes are currently mired in a bear market.
Yet amid this heightened volatility, investors have found solace with stock-split stocks.
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Stock-split mania is a force to be reckoned with on Wall Street
A "stock split" is an event that allows a publicly traded company to alter its share price and outstanding share count without affecting its market cap or operations. A forward stock split reduces a company's share price and increases its outstanding share count by the same factor. Comparatively, a reverse stock split increases a company's share price while reducing its outstanding share count by the same magnitude.
Investors tend to be most excited about forward stock splits for two reasons. First, they make previously high-flying stocks more affordable. Everyday investors who don't have access to fractional-share purchases through their online brokers won't have to set aside as much cash to purchase a single share following a forward split.
Arguably even more important is the fact that forward stock splits act as a beacon for top-performing stocks. A publicly traded company wouldn't be enacting a stock split if its share price hadn't soared -- and its share price wouldn't have soared if it wasn't out-innovating its competition and executing well.
This year, more than 200 stock splits have been undertaken, including a number of high-profile companies. Perhaps the most polarizing of the bunch is electric-vehicle (EV) manufacturer Tesla (TSLA 4.96%), which completed a 3-for-1 forward stock split in August.
Depending on who you ask, Wall Street pundits see Tesla skyrocketing by as much as 608% from its closing price on Oct. 11, 2022 or potentially plunging by up to 89%.
Is a 7X return in the cards for Tesla?
On one end of the spectrum is arguably the biggest Tesla bull of the bunch, Cathie Wood. The CEO and CIO of investment-management company Ark Invest, who gained prominence for her outperformance following the COVID-19 crash, has a whopping $1,533.33 price target on Tesla by 2026. (Ark's April research note calls for a $4,600 price target, but this was prior to Tesla's aforementioned 3-for-1 split.) If accurate, North America's leading EV maker would offer a greater-than-600% return over the next four years.
Wood's methodology anticipates that Tesla will generate (drum roll) $843 billion in revenue by 2026, with 57% of this figure coming from EVs, 34% from robotaxis, and the remaining 8% from a mixture of human-driven ride-hailing services and insurance. Ark's modeling assumes $280 billon in earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2026. To offer some context, Wall Street's consensus is for Tesla to report $84 billion in full-year sales this year.
To break things down even further, Wood's company provided outcome ranges for its most bearish ($966.67 split-adjusted price target) and bullish ($1,933.33 split-adjusted price target) forecasts. Ark foresees between 10 million and 17 million EVs produced annually in 2026, with vehicle gross margins ranging from 34% to 46%, excluding renewable-energy credits. Again, for context, Tesla is on pace to surpass 1 million EVs produced and delivered in 2022.
Could the world's largest automaker by market cap plummet below $25/share?
On the other hand, Gordon Johnson, the CEO and founder of GLJ Research and a longtime Tesla bear, sees the company plunging from its current value. Even after raising his firm's price target on Tesla from $67 to $73 in mid-July (these are pre-split price targets), the split-adjusted $24.33 target offered by Johnson implies up to 89% downside by the end of 2023.
Johnson has long had two big issues with Tesla. First, he doesn't believe the company can justify its valuation -- i.e., being worth as much as virtually all other automakers combined -- without adding 100,000 new EVs on an incremental quarterly basis. The good news in this department is that the Austin, Texas and Berlin, Germany gigafactories came online earlier this year. Ramping up output at these facilities should help Tesla maintain rapid EV delivery growth in the near term. But beyond a year or two from now, it's unclear how Tesla would continue adding to its quarterly production.
The other concern Johnson has with Tesla is the company's accounting practices. For instance, CEO Elon Musk's stock-based compensation, which can total in the billions of dollars, is recognized under selling, general, and administrative (SG&A) expenses. SG&A can vacillate wildly from quarter to quarter, which Johnson believes is helping to obfuscate the true operating efficiency of the company.
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Which Wall Street forecast should you trust?
Ultimately, both price targets are probably far too extreme to be taken seriously.
Although Cathie Wood is known for her exceptionally bullish takes on game-changing technology stocks, her investment-firm's model makes little sense, given the data we have available. Not a single robotaxi has made it to public roads, yet the Ark model suggests robotaxis would account for 34% of revenue by 2026. As long as level 5 full self-driving technology goals keep getting pushed down the road (literally and metaphorically), Wood's estimates for overall production and robotaxi revenue make her firm's $1,533.33 price target virtually impossible to hit.
Something similar can be said for Gordon Johnson's ultra-bearish price target of $24.33. Even if Tesla's production fails to grow as quickly as most Wall Street analysts expect, the company pushing into recurring profitability would likely keep it from falling anywhere close to $25/share. If anything, production ramp-up potential at Berlin and Austin should allay near-term production-slowdown fears.
However, I do side with Johnson in the belief that lower is where Tesla will head next, albeit not for the same reasons he cited. My two big concerns for Tesla are declining competitive edges and Elon Musk.
As for the former, Tesla's flagship sedans are already being challenged on the capacity and range front by legacy and new EV makers. With most auto companies investing billions or tens of billions of dollars on EVs and accompanying technology, it's going to be almost impossible for Tesla to retain its existing competitive advantages over the long run.
The far bigger issue for this widely held stock-split stock is its CEO. Musk has become a massive financial, legal, and operating liability for the company. Specifically, his promises as to when new EVs or technologies will make their debut are rarely, if ever, achieved. Since Tesla's valuation is built on these promises, continued can-kicking on new EVs and innovations by Musk could be what pushes Tesla's share price over the proverbial cliff.
