Tesla Shares: Do Stock Splits Matter?
It is certainly true that if you are around long enough, you will probably see it all—but that is not the case on Wall Street. There are plenty of surprises remaining no matter how deep your experience.
Most recent was the magic carpet ride in the shares of Tesla (NASDAQ:TSLA). During trading on Thursday, August 20, the electric car manufacturer (and some would argue technology company) hit a price that took its valuation to a whopping $378 billion according to Yahoo Finance.
Will the good times continue for this avant-garde company? Opinions are strong and varied.
The bulls say Tesla is much, much more than a car company. They point to cutting-edge battery technology and a strong presence in solar power, complimenting a fast-growing car business.
For some, the case for Tesla shares can be quite emotional. They see a higher purpose in the company’s products, which is a necessity to help us gravitate away from fossil fuels. With that as their underlying premise, it’s easy to see how they view the company’s potential as enormous.
Replace fossil fuels? If that’s the story, if that’s what Tesla will do, then the company may have quite the opportunity ahead!
Tesla’s bears may scoff and question the sanity of the market assigning such riches to a company with a mere $25.7 billion in revenue according to Yahoo Finance. Some view it as an empty suit, a company ultimately destine for failure.
The massive run in this stock since March was extended when the company announced earlier this month that they would split their stock. For the life of me, I can never understand why a stock split has any impact on a stock’s price, but it sure creates a buzz.
But why? My opinion is that the number of shares outstanding for a company has no bearing on its value. In fact, I don’t think this actually qualifies as “opinion.” I believe it’s a mathematical truth.
When analyzing a company, the goal is to establish a valuation for the whole business. You do that based on financials, their prospects, and your expectations.
Once done, you divide your value of the entire business by the number of shares outstanding. This simple calculation gives you your own personal fair value for the stock price. Doubling or tripling the denominator (number of shares), changes the price target but not the company’s value.
I would liken the value of a stock split to asking you the question, which would you prefer:
a. A one-dollar bill
b. Four quarters
c. Or, Ten dimes?
Please submit your response and we’ll provide our survey results in a future Navigator.
Stay focused on understanding things that affect valuation. Once you’ve done this work, you’ll begin to realize there may be no certainties. In fact, you will know your analysis is complete when you understand the things that keep management up at night; the risks they face in delivering results.
Once your work reaches that point, you have to decide if the company’s current stock price properly handicaps those risks.
The bull and bear arguments for and against Tesla have to be evaluated in light of the risks the company faces, and its opportunities. Will they single-handedly replace the world’s dependence on fossil fuels? We believe it is unlikely. Will the company fail? We sure hope not, but all companies ultimately face that risk!
Between the extremes is where most investor judgments have to be made.
Personally, I would rather not talk about individual stocks. We are not in the business of advocating individual investments (and once again I want to reiterate that we offer no opinion on Tesla here), we do our work without fanfare. But the swirl around Tesla right now does merit mention, if only to remind you that investing is a marathon and not a sprint and you should maintain a disciplined process.
If you would like to discuss the work we do for all our clients, please give me a call.