With so much momentum in both Teslasay (NASDAQ: TSLA) share price and its underlying business, is this a good time for the carmaker to split it again?
Believe it or not, it was only six months ago that Tesla surprised investors with a 5-for-1 stock spread. Despite the share splitting into fifths, the price has already risen more than half the value it pre-distributed last year. Moreover, it is not just the stock that has gained momentum since last summer: sales of electric cars have risen, and profitability now seems to be here to stay. These could be signs that the growth share could get a split again this year.
Let’s discuss some basics before we get started.
Image source: Tesla.
What is a share split?
First, it’s worth explaining exactly what a stock split is. The most important thing to know about a stock split is that it does not technically make investors richer and that the company whose shares are split does not provide incremental capital. A share split is simply a split of one share into multiple new shares with a value of the original share.
Do you still not understand it? Try this analogy: assume you owned one share in Tesla. Visualize this part now as one complete pizza. Then someone steps up and cuts the pizza into quarters. While you now have a sliced pizza, the total amount of food remains the same. The same applies to the total value of the ownership of a shareholder in a company before and after a 4-for-1 share split.
The critical takeaway here is that a share split does not create value for shareholders. Sure, Tesla stock has risen sharply since its recent share split – but that doesn’t always happen after a share split. The rise in Tesla shares is due to operating performance, including strong sales growth and improved profitability. In addition, the company simply grew into analysts and became Wall Street and a darling in the stock market.
Why a Tesla share split in 2021 is possible
Companies usually do not consider a follow-up share split unless several things happen. First, the stock needs to trade significantly higher than its previous stock split. After all, one of the main reasons why companies divide their shares is to make shares more affordable for retail investors. This makes the company’s shares more liquid and accessible to more investors.
Tesla definitely meets this criterion. Since the company announced a share split last August, the shares have risen by almost 200% on a split-adjusted basis. Today, the stock trades at a high price of more than $ 800 – well above the average share price of most companies.
Image Source: The Motley Fool.
Tesla’s recent strong progress in business is also a good thing for another share split. If the rise in the stock is based only on hot air, you may not know how long stocks can stay at their elevated levels. And if stocks have a good chance of losing all their recent gains, why split stocks again?
Fortunately, Tesla’s underlying business seems to be shooting at all cylinders. The 12-month delivery after the announcement of shares in Tesla was approximately 388,000. Today it is 500,000. Furthermore, management has predicted that deliveries will exceed 750,000 by 2021, showing what it looks like the company is still early in its growth story.
Finally, Tesla’s quarterly free cash flow and cash on hand increased from $ 418 million and $ 8.6 billion in the second quarter of 2020, respectively, to $ 1.9 billion and $ 19.4 billion in the fourth quarter of 2020, respectively. giving much healthier finances today.
Of course, Tesla investors should not count on a share split in 2021. There is simply nothing to know about when the car and green energy business can split its shares again – if ever. Furthermore, there is no reason to get excited about a potential share split because it creates no value for shareholders. Nevertheless, there appears to be a growing case for another share split.