Is Another Stock Split On The Cards?

Is Another Stock Split On The Cards?

Tesla’s stock price is always an exciting watch and over the past couple of months, the US-based EV manufacturer has seen a lot of momentum. Tesla’s shares, product sales, redesigned models, new vehicles coming to market, completion of its Giga factories and further global expansion, are all contributing to significant business growth, which is sparking questions as to whether Tesla will consider splitting its stock again. It’s only been six months since the electric vehicle manufacturer took the market by surprise with its first 5-for-1 stock split announcement.

In spite of its shares being split into fifths, the individual stock price has appreciated to over half its pre-split value in August 2020. While the stock is seeing continued growth, so is Tesla’s sales pushing profitability and all these indicators could be on the path to another splitting of shares.

Understanding Stock Splits

Firstly, stock splits don’t technically make investors wealthier and neither does it give the company’s shares incremental capital. Splitting stock is a simple division of one share into multiple new shares and the value of the new shares have a combined value of the original share. The motivating reasons to divide stocks is to enable them to be more affordable, more liquid, and more accessible to retail investors.

So, stock splits don’t create more shareholder value even though Tesla’s shares have sharply increased over the last six months. However, this was not due to the split but rather because of strong sales and optimism in the company’s future strategies, which has made the carmaker a stock market favorite.

Why 2021 Could See Another Tesla Stock Split

It’s fairly rare for companies to even consider a follow-up stock split except if a number of things happen.

Firstly, the stock would be trading considerably higher than prior to the split. Tesla can tick this off the list of criteria because since August last year, its shares increased by nearly 200% on a split-adjusted basis. And currently Tesla shares are trading at over $800, which is outside most companies’ average share price.

Secondly, another reason Tesla could initiate another stock split is due to its business growth. the EV company is making good progress across all areas, and reporting positive results. When Tesla first did the stock split, they had delivered 388,000 vehicles and by December that figure reached 500,000. Tesla management has also given guidance for 2021 to exceed 750,000. All these indicators point to unceasing progress.

And to top it off, Tesla reported an increase in its quarterly free cash flow and cash on hand from $418 million and $8.6 billion in 2020’s second quarter to $1.9 billion and $19.4 billion at the end of last year, showing very healthy financials.

Another portion of Tesla’s revenue also comes from regulatory credits, which are provided by government under certain environmental regulations that include zero-emission vehicles, and clean fuel. The credits can be based on the number of vehicles sold by the company or on the level of emissions. Since these credits are tradable, Tesla is able to sell the surplus to other car manufacturers that don't have enough credits. This results in Tesla receiving a pure profit from them.

Investors are clearly optimistic about the future of Tesla, which was evident with a big Dutch pension initiating a position in Tesla along with making other large investment changes in publicly traded securities. Netherlands-based company, PGGM of Zeist, Netherlands, bought into Tesla (TSLA), Apple (AAPL) and Microsoft (MSFT) stock. The pension company purchased 79,048 shares of Tesla, being its first investment in the EV giant.

While investors shouldn't bank on seeing another stock split in 2021, the case does seem to be gaining substance for the possibility on it happening.