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At a shareholder meeting on March 28, Tesla made waves when management said it intended to seek stockholder approval for a stock split. While the specifics of the split weren’t announced, last year’s 5-for-1 split resulted in each share being worth roughly $200. With Tesla stock trading at about $1,000 per share now, a comparable division would imply that each share is worth around $200.

The split-and-dividend method works by cutting a fifth off each share’s value and paying out four extra shares, ensuring that stockholders are compensated. Between the announcement and the actual split in August 2020, Tesla’s previous split generated an incredible 80% rise in the stock price.

Anyone who bought the stock prior to the announcement and kept it through the split made an amazing 80% return in less than a month. However, since August 31, 2020, the stock has risen another 120%, including the back-end price correction that occurred immediately after the last split was completed.

However, the split may have been a beneficial catalyst in the short term, but it was Tesla’s business performance that has pushed its shares higher over the past year and a half. Investors should be more interested in Tesla’s execution and plans rather than any planned split given the company’s positive growth trajectory.

Improving financials

Since nearly declaring bankruptcy on Christmas Eve 2008, Tesla has made tremendous progress. The firm presently has $17.6 billion in cash with just $5.2 billion in debt on its balance sheet, according to the company’s latest filing. Overall, Tesla generated about $5 billion in free cash flow throughout 2021, proving that it can operate without reliance on external capital.

Tesla has proven the bears wrong, proving that it can be profitable. Tesla sold energy credits to prop up its business, and they’ve been debunked as false. According to generally accepted accounting standards (GAAP), Tesla earned only $314 million in credits during the fourth quarter, a decline of 22% year over year. According to generally accepted accounting principles (GAAP), it had an 14.7 percent operating margin, which is nearly three times Ford’s 5.4% and General Motors’ 4.5% margins. Tesla’s operating efficiency has improved, resulting in an increase in net income. Tesla’s profit per share (EPS) rose 754 percent to $2.05 in the fourth quarter, thanks to this rise in operational efficiency. Tesla is both profitable and expanding quarterly sales at a 71% year-over-year rate.

The valuation

The stock’s exorbitant valuation is one of the reasons Tesla bears choose to short it. The Tesla stock price is extremely expensive, with a P/E ratio of 219 and a free cash flow multiple of 347. When compared to legacy automakers such as Ford and GM, who have P/Es of 3.7 and 6.4, respectively, Tesla’s valuation appears to be unjustified.

Tesla is, however, no traditional auto maker. Its direct-to-consumer business model gives it profit advantages, and Tesla has other plans in the solar roof and battery pack arena. With Musk at the helm, it’s difficult to predict what Tesla will do next. Some people see this as a negative attribute, while others think it’s a good thing.

Regardless, the company’s value is the main investment risk at this time. Buying a decent business at an incorrect price might result in disappointing investment returns.

As time goes on, the stock’s valuation will fall as Tesla’s profit margin rises and revenue develops.

Tesla makes an excellent investment when you consider its strong business in a developing market. Because of the great valuation, it may be prudent to ease into the stock gradually. Tesla’s stock is volatile and has experienced several downturns as it approaches its current high valuation. And if the price responds as it did during Tesla’s 2020 stock split, investors may want to wait. While I don’t think the stock will have a similar 80 percent rise like it had in 2020, I am confident that it will continue to excel.

Author: Scott Dowdy

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