While I think the shares are overvalued and its vehicles have serious quality problems, the strong emotional connection between customers and Tesla extend from its product to its stock.
Therefore the stock split announcement will add fuel to the upward movement in Tesla stock.
Tesla’s Stock Split
The announcement of its stock split — mirroring Apple’s 4-for-1 split announced July 31 — reversed a down day for Tesla. Tesla stock fell .1% to $1,374 during regular trade on August 11. After announcing a 5-for-1 split, the shares popped nearly 6% to $1,456 in pre-market trade on July 12.
Tesla’s stock split — done to make its stock “more accessible to employees and investors,” according to Reuters — will add four new shares to each share of the stock held by investors. To qualify for the split, investors must own shares in Tesla by August 21st.
These Tesla stockholders will receive four additional shares of Tesla after close on August 28th. On August 31st, Tesla will begin trading on a split-adjusted basis. according to the Verge.
If Apple’s stock split is any indication, Tesla’s announcement should be good for the stock in the short term. After all, since July 30, the day before Apple announced the split — which gives owners of Apple stock on August 24th three more shares that begin trading on a split-adjusted basis on August 31st — its shares have risen 13.7% from $384.76 to $437.50.
Tesla stock — about 8% of whose shares were sold short as of July 15 — has enjoyed a much better year than Apple’s. Tesla shares were up 219.4% through August 11 while Apple shares increased a relatively paltry 45.8% during that period.
I think the reasons to buy Tesla stock outweigh the reasons to avoid it.
Reasons To Buy Tesla Stock
Here are four factors driving up Tesla stock:
- Individual investors like the stock. “While many institutional investors have avoided Tesla’s stock in recent years due to a lack of consistent profitability, the company has a strong following among individual investors. Over the past 30 days, Tesla was second only to Apple as the most popular stock on the Robinhood trading app,” wrote Reuters.
- Customers have a strong emotional attachment to Tesla’s brand. As I wrote in early August, customer enthusiasm for Tesla vehicles is high. According to the second part of the J.D. Power survey — Automotive Performance, Execution and Layout Study, “In the survey measuring cars’ appeal, Tesla scored 896 out 1,000 points, better than any other brand. The next highest score went to Volkswagen AG ’s Porsche, with 881, which ranked as the top premium brand, and Dodge, with 872, to stand atop the mass-market ranking.”
- Tesla could be added to the S&P 500. After earning a profit for four quarters in a row, Tesla could be added to the S&P 500 index — which would send much more money flowing into its shares, noted Reuters.
- Tesla is expanding geographically and adding new products. Demand and supply are increasing. Analysts see strong demand for Tesla’s electric vehicles, praise its new factories being built in Texas and in Germany, and look forward to the expected launch of the Cybertruck, its electric pickup, according to MarketWatch.
Reasons To Avoid Tesla Stock
There are many negatives for investors to consider:
- Tesla manufacturing quality lags the industry. As I wrote in August, in the J.D. Power annual Initial Quality Study released June 24 “Tesla vehicles, in their first time appearing in the survey, were found to have 250 problems per 100 vehicles compared with an industry average this year of 166 problems.” As David Sargent, VP, Global Automotive at J.D. Power, told me in a July 24 interview, “Tesla’s score of 250 was the highest of any manufacturer in the study. Why the poor quality? It’s not the fact that they are making an electric vehicle. It’s the basics.”
- Tesla’s revenue is too dependent on selling tax credits. As I wrote in July, Tesla — which has lost more than $6.78 billion since 2003, according the Journal — has happily taken advantage of a regulation that enables it to sell carbon-emission tax credits to its rivals. In 2019, Tesla generated $594 million in revenue by selling these highly profitable tax credits. In the first half of 2020, Tesla tax credit revenues amounted to $782 million. For the second quarter, selling tax credits enabled Tesla to “eke out a $104 million profit,” the Journal wrote. In the analyst conference call on July 22, Chief Financial Officer Zach Kirkhorn said he expects roughly $1.2 billion in 2020 revenue from selling the credits — “about twice as much as in 2019,” wrote the Journal. Morningstar concluded that Tesla would have lost money without the tax credits. According to its analyst David Whiston, “We calculate Tesla had a pretax loss of $278 million excluding $428 million of regulatory credit revenue.”
- Tesla’s Free Cash Flow (FCF) situation is precarious and got worse in the second quarter. Tesla’s FCF improved from -$4.1 billion, to -$220 million to +$970 million. Sadly in the second quarter of 2010, Tesla’s “GAAP free cash flow fell 31.9% year over year to $418 million,” wrote Whiston.
- Tesla stock is over-valued. As of August 11, Tesla’s market value “stood at more than Toyota Motor Corp. and Ford Motor Co.’s combined,” according to the Wall Street Journal. Put another way, every dollar of Tesla revenue is valued at $10.21 in the stock market — compared to 76 cents and 22 cents, respectively, for Toyota and Ford. That valuation is high for a company that suffered a nearly 5% drop in sales in the second quarter.
The emotions of consumers and investors will prevail in the war between the Tesla shorts and longs.