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Does Split Makes Tesla Stock Attractive?

Tesla, the popular electric vehicle maker, would trade adjusted for the split on Monday. Do shares look attractive after the split?

Earlier this month, Tesla announced a five for one stock split after the stock’s sharp rally. It was preceded by the announcement of Apple’s four for one stock split last month.

Both Tesla and Apple have rallied this year as investors have added tech shares this year anticipating an increased pace of digitization due to the pandemic.

Tesla stock price

Tesla stock up over 60% since split news

Tesla stock has gained over 60% since the company announced the stock split on 11 August. Shares are up over 429% so far in 2020. This basically means that despite the five for one split, the stock would trade higher than what it did without the split at the beginning of the year.

Tesla commands a market capitalization of $412bn. That’s more than Toyota Motors, Volkswagen, General Motors, Ford, and Fiat Chrysler put together. Several analysts have raised concerns over Tesla’s soaring valuations.

For instance, Tesla trades at a trailing price to earnings ratio of over 1,100x. The forward multiple of 172x looks no cheap either. It has an enterprise value to sales multiple of 11.1x which again looks too high for comfort.

Ashwath Damodaran, popularly known as the “Dean of Valuation” said that to justify its valuation Tesla would need to make revenues similar to Volkswagen with margins like Apple and make investments in manufacturing “like no other manufacturing company has before.”

Damodaran put a $427 price target on Tesla under an “optimistic scenario.” Shares currently trade over five times what Damodaran valued them earlier this year.

While the electric vehicle story looks for real, the valuations for electric vehicle stocks are getting too overheated in the short term.

Jim Cramer’s views

However, Jim Cramer, the host of Mad Money show on CNBC advised investors to buy Tesla and Apple shares if they fall after the split.

“If you judge Apple as a pure hardware play, or you judge Tesla as a pure car company, then you’re right, all these moves are all smoke and mirrors,” said Cramer justifying the rally in Tesla and Apple shares this year.

He added, “They’re both stocks — and in the end, stocks can break your heart — but if Elon Musk and Tim Cook continue to execute, I bet their long-term trajectory is up.”

He however does not expect much from the company’s upcoming battery day. “I fear that Battery Day might end up being some letdown, but you’ve got my blessing to buy it into any split-related weakness next week, then you can ring the register on part of your position before Battery Day on Sept. 22nd, just in case.”

Cramer added, “Long-term, though, even after a 1700 point gain, I know Musk has got more magic in the tank.”

Should you buy Tesla stock after the split?

The split fundamentally changes nothing for Tesla apart from the expected increase in liquidity in its stock. However, while liquidity can be a short-term driver, in the long term, stocks move up in proportion to their earnings.

Earnings haven’t been Tesla’s strong point and even Musk admitted during the second quarter earnings call that the company might not be super profitable.

However, Tesla bulls have differing opinions as is reflected in the stock’s sharp rally this year.

Tesla shares have rallied 87-fold since the IPO in 2010. We have compiled a guide on how to buy Tesla stock.

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Mohit Oberoi

Mohit Oberoi is a freelance finance writer based in India. he has completed his MBA with finance as majors and also holds a CFA charter. He has over 13 years of experience in financial markets. He has been writing extensively on global markets for the last six years and has written over 6,500 articles. He mainly covers metals, electric vehicles, asset managers, and other macroeconomic news. He also loves writing on personal finance and topics related to valuation.