Tesla Stock Split
While the rest of the world has been in a continued state of collapse (or at the very least a reshaping) due to COVID-19, Tesla Inc (NASDAQ:TSLA) has had everything go pretty much according to plan. Which is to say that TSLA stock is having one of its best years.
The recent announcement of a Tesla stock split is only going to make things more attractive for an already explosive electric vehicle stock.
On August 11, the company announced a five-for-one stock split, which will apply to each stockholder of record before August 21. The changeover will take place after market close on August 28 and the first trading day with the new influx of TSLA stock will be August 31. (Source: “Tesla Announces a Five-for-One Stock Split,” Tesla Inc, August 11, 2020.)
To be fair, stock splits aren’t as powerful as they used to be. One of the reasons being the growing share of major institutions doing the bulk of trading. As of February 2018, 84% of all American-owned stocks were held by the wealthiest 10%. (Source: “We All Have a Stake in the Stock Market, Right? Guess Again,” The New York Times, February 8, 2018.)
And while the Tesla stock split will lower the face value of each share, that isn’t as important as it used to be, due to the rise of fractional trading, a form of trading that allows investors to buy slices of stocks.
But that doesn’t mean stock splits don’t matter at all. In fact, I think many analysts are downplaying how the TSLA stock split could be a huge boon for the company.
What analysts often fail to see (and one of the main reasons they’re often wrong about the stock market) is that this is a mental game. It’s about perception and belief as much as it is about economic theory and hard facts. What investors feel can often trump what the actual data tells us, or what the market is showing.
In that sense, the stock split is a big win for Tesla Inc, as it will reduce the company’s face-value share price significantly, potentially wrangling in more investors, especially smaller ones who want to get in on the booming electric vehicle stock.
Robinhood Markets, Inc., an investing app especially popular among younger investors, saw about 40,000 accounts add Tesla shares in a four-hour period on July 13. (Source: “Ten Thousand Day Traders an Hour Are Buying Tesla Shares,” Bloomberg, July 13, 2020.)
I anticipate that Robinhood and other platforms of its ilk will see continued thirst for Tesla stock, and may even see another rapid surge in accounts being created. Again, while this is a relatively small fraction of the market relative to big institutional investors, what smaller investors can do is precipitate a massive rush toward TSLA stock.
While institutional investors have a lot of investment priorities on auto-pilot due to the prevalence of algorithmic trading, smaller investors, as mentioned earlier, often go by gut feeling and are prone to moving as a herd.
Smaller investors could cause a surge in Tesla stock when they see the price drop. That could either trigger the algorithmic trading of the large institutions or alert the human operators of large funds, prompting more capital to flow toward Tesla Inc.
As such, we should look at retail investors as the vanguard. They aren’t the largest force in the market, but they’re often a predictive and proactive one.
The new TSLA stock split opens the company up to precisely this scenario, which in turn would result in another surge for Tesla stock.
To be fair, it’s not like the market is totally blind to this opportunity. TSLA stock gained about 10% by the early afternoon following the announcement of the stock split.
What’s more, this is all coming on the back of what has already been an extraordinary year for Tesla stock.
Chart courtesy of StockCharts.com
TSLA Stock in 2020 and Beyond
Analysts, many of whom were doomsayers regarding Tesla stock, have certainly changed their tune as of late. The electric vehicle stock has not just proven many wrong, but has made them look outright foolish (and, to blow my own horn a little here, made those who have been bullish on TSLA stock for years seem like oracles).
Wall Street, sometimes behind on major market trends, is finally coming into the pro-Tesla fold. Joe Osha, an analyst at JMP Securities LLC, was impressed by Tesla Inc’s recent sales figures, and upgraded the company’s outlook.
“If the company can manage 90K units during an extraordinarily challenging quarter, there is no reason that TSLA cannot be shipping 130K to 140K units a quarter by the end of the year in our opinion. That puts TLSA on a trajectory to ship 757K units in 2021,” said Osha. (Source:”Tesla Will Surge Another 24% Over the Next Year as It Grows to $100 Billion in Revenue by 2025, Says New Biggest Bull on Wall Street (TSLA),” Business Insider, July 6, 2020.)
Projections now have the company delivering over 2.5 million vehicles, hitting $100.0 billion in revenue, and having an earnings before interest, taxes, depreciation, and amortization (EBITDA) margin of 20% by the end of 2025.
“We believe that TSLA is a category killer that is still early in the process of building a dominant position in electric vehicles, and the stock needs to be valued in comparison to other similarly successful companies,” added Osha. (Source: Ibid.)
Piper Sandler Companies, a respected investment bank, was similarly gushing about Tesla Inc’s future.
“It’s hard to see how competitors can catch up,” said Piper Sandler. (Source: “Tesla Will Continue Its Monster Run and Jump Another 55% to $2,322, Wall Street Firm Says,” Business Insider, July 14, 2020.)
The future of Tesla is about as exciting as you can get.
First, you have the company’s long-awaited release of solar-powered batteries to be used in people’s homes. With the fight against climate change gaining both political and social momentum, it would only make sense for companies to try to profit from this shift in technology and values.
Tesla Inc, as it stands, is one of the strongest competitors in this space, having essentially pioneered the commercial green-energy car, alongside its battery.
Elon Musk, CEO of Tesla, who receives equal attention for both visionary and bonehead moves, also has other projects on the go. Space Exploration Technologies Corp., more commonly referred to as SpaceX, is the man’s dream project to privatize space exploration.
SpaceX is famous for having completed a human delivery to the International Space Station on behalf of NASA, while also running supply missions to the station and having built the first reusable rocket.
Not to be outdone, Jeff Bezos, the richest man in the world, also wanted to get in on the space action, starting his own company, Blue Origin Federation, LLC, to directly compete with SpaceX for government contracts.
That competition came to a head when the U.S. Air Force was handing out big government contracts in an effort to replace Russian rocket technology. Both SpaceX and Blue Origin were competing for said contract, but SpaceX emerged victorious. (Source: “Elon Musk Beats Jeff Bezos to U.S. Air Force Contract As Billionaire Space Race Blasts Off,” Forbes, August 10, 2020.)
SpaceX and United Launch Alliance—a joint venture between Lockheed Martin Corporation (NYSE:LMT) and Boeing Co (NYSE:BA)—were both awarded contracts for the National Security Space Launch program. The contracts were worth a combined $653.0 million for launch services to be provided for a five-year period starting in 2022. (Source: Ibid.)
While SpaceX remains a private company and, at the moment, is only tied to Tesla Inc via Musk, there have long been theories that Musk wants to fold the two companies together, something that would radically alter the future of Tesla stock virtually overnight.
The problem, up until now, was that SpaceX costs a lot to operate (it’s literal rocket science), and until the company can justify its high costs with recurring and reliable revenue, it won’t do TSLA stock any good.
But with the continued advances made by Tesla and SpaceX, it’s becoming more and more likely that the two companies will have some formal connection in the future. Whether that means being folded into the same company or simply sharing technology, who knows?
But one guaranteed benefit of SpaceX is that it opens doors to government for Musk, which he can then parlay into Tesla stock gains.
For instance, while making government deals regarding space, Musk will be connected with—and be able to more effectively lobby—politicians. Lobbying in the borderline-collegiate atmosphere of Washington will likely pay off for TSLA stock down the line.
There are few companies that are riding as high as Tesla Inc right now. And that ride shows no signs of slowing down. Tesla stock will likely continue to see strong gains this year and beyond.