Tesla stock has had an insane uplift in its stock price this year. Insane. Inexplicable. Fundamentals of this stock now make very little sense. TSLA seems to be traded on emotions and sentiments rather than financial logic. The stock price is so high that Musk (with Tesla Board Approval) decided to split the stock 5-for-1. This will take effect at the end of Aug and this news was announced on Aug 11 after market close. Apple too announced a stock split as part of its Q2 earnings call in July, and that sent the APPL stock soaring to its highest levels and towards a $2tn market capitalisation. Yes, that is two trillion dollars!
In reality, stock splits add zero value. Tesla will remain the same company, with same financials, with same market capitalization after the stock split. Literally nothing changes post a stock split, except the stock price divides, and number of outstanding shares in the market multiplies keeping the market capitalisation exactly the same. This doesn't have any impact on Tesla potentially getting added to the S&P500 index either as that index is weighted using Market Capitalisation unlike DJIA index which is Price weighted.
Post the announcement of the stock split, Tesla stock was on fire! It rallied up to nearly +16% intraday at one point. And has gone up another 4-5% on Aug 13. Nearly 20% up on a stock split announcement is pretty insane.
There is this theory that millenials (of which I am one!) would like to own a full share of Tesla, however a high c$1,500 per share price point is not affordable and a stock split 5-for-1 will price the stock around $300 a share, which is more affordable for millenails. This theory / explanation makes very little sense to me! We live in 2020. Millenials have access to many fintech platforms that offer zero/commission free trading and many brokers now allow individuals to own fractions of a share rather than a full share. Fractional ownership already makes possible what the stock split is pretending to achieve first. Sure, owning fractions means doing some quick mental math i.e. divide the hefty share price to determine the price for the fraction the investor wants to buy/sell. The trading platforms also aid users with this mental math on their portfolio performance screens. Stock Split probably takes away the need to divide (mental math!). But, surely, the 20% up tick in stock price is not because millenials prefer not to do mental math or because portfolio performance screen on the trading platforms look cleaner without fractional shares in an investor's portfolio!
Tesla stock was trending down for a few days in early August. But, the stock has rebounded in the last couple of days and the insane rally can only be attributed to the stock split announcement as there have been no other really good news about Tesla in the past few days. This makes me question if Tesla is a really dangerous stock to own?! The stock is very volatile and the swings can mess up an investor's portfolio. The fundamentals, specifically multiples on revenue, that this stock is currently trading at indicate a significant overvaluation by the public markets. Analyst Recommendations (for what this is worth!) also point to Hold or Sell, with very few analysts recommending a Buy / Strong Buy.
The short sellers have been waiting for the stock price to crash. They were predicting around $700 for the stock in a few months time. Well, the stock will trade around $300 from Sep - thanks to the stock split. The short sellers will get the price they were aspiring for but they won't make any profits unforunately as the number of shares will multiply with the reduction in stock price.
Overall, if you own Tesla Stock, be cautious. Balance your portfolio with some other strong auto names and cyclical stocks. The volatility in TSLA is very dangerous, especially for new investors. I am expecting another massive up wave for the stock in Sep when the S&P500 index addition may happen. I have no clue where the stock price will land if the inclusion happens. But, since we are all sort-of-speculating with Tesla stock, I will take a punt and say - it can go up as high as $500 a share if the inclusion happens in Sep and as low as $200 a share if the inclusion does not happen. These prices are post the stock split that is expected to happen end of Aug.
Enjoy investing! Do not gamble.
Comments