Stock splits were all the rage on Wall Street last summer, with companies like Alphabet, Amazon, and even Tesla (TSLA -2.04%) participating in the frenzy. Although stock splits might not significantly impact a company's valuation, they can serve a purpose, including attracting more retail investors to purchase shares at a reduced price.
Tesla, the automotive and clean energy company, is one company that might consider another stock split, as it trades for nearly $300 per share. Let's explore what happens when a company splits its stock and whether Tesla might do it again soon.
What's a stock split?
A stock split occurs when a company increases its outstanding shares while keeping the total market capitalization unchanged. To provide an analogy, imagine a pizza: Whether you divide it into eight or 16 pieces, it remains the same-sized pizza.
In investment terms, suppose you currently hold 10 shares of a company priced at $100 per share, and the company enacts a 2-for-1 stock split. In this case, your ownership will increase to 20 shares, each valued at $50, yet your investment remains the same.
Why would Tesla split its stock?
A stock like Tesla, trading at around $275 per share at this writing, can be unaffordable for certain prospective buyers. And although several brokerages offer fractional shares, notable ones such as Vanguard do not provide this option.
In theory, a lower share price can make a stock more affordable for a larger pool of investors, potentially resulting in increased demand for the company's shares. This heightened demand can lead to a rise in the company's market capitalization.
Additionally, Elon Musk has previously claimed that a lower stock price is beneficial for attracting and keeping skilled workers. This is because it allows Tesla employees greater flexibility in handling their ownership through compensation packages or employee stock purchase plans.
Will Tesla split its stock?
Tesla has split its stock twice over its 14 years as a publicly traded company, both of which occurred within the last three years. The most recent one, a 3-for-1 split, happened in August 2022.
Notably, Tesla stock traded at approximately $2,250 per share when the company did a 5-for-1 stock split in 2020 and roughly $900 per share when it split its stock in 2022.
Musk hasn't made any recent public statements about the possibility of a new stock split. Additionally, when you consider Tesla's current stock price of $275 per share is lower than the price after its most recent split of $300 per share, it seems unlikely that the company will announce a split at its current stock price.
Is Tesla a buy?
Tesla is still largely considered a growth stock, meaning it's getting priced for its impressive revenue expansion. However, Tesla is more expensive than the average stock in terms of profitability ratios like price-to-earnings (P/E).
Digging into the numbers, Tesla's revenue jumped from $16.8 billion to $19.9 billion, or 18%, in its first quarter of 2023 compared to its first quarter of 2022. Moreover, Tesla recently released its vehicle production results for its second quarter of 2023, and the company produced nearly 480,000 vehicles while delivering roughly 466,000 vehicles. While the company won't release its full financial results until July 19, that represents a remarkable growth from its second quarter of 2022, when it produced 259,000 vehicles and delivered 255,000 vehicles, or a year-over-year increase of 85% and 83%, respectively.
Living up to its growth stock status, Tesla is trading at a P/E ratio of 83, which is significantly higher than the S&P 500 P/E ratio of 25. Notably, the company's P/E ratio has been incredibly high over the past five years, with an average of 206. For the investors scared off by Tesla's P/E ratio, they have missed out on a potentially life-changing return of more than 1,200% during that time.
Tesla stock isn't for the faint of heart, as its price is frequently volatile. Still, considering its past success and meteoric productivity increase, the stock is essential to any growth investor's portfolio.
