Tesla’s stock split is an Elon Musk mind trick
Tesla’s share split, which aims to make the stock more attractive to small investors, comes as surging demand for electric vehicles promises to boost profits.
As the founder of one of the most richly valued manufacturing companies in history, with a personal wealth of some $US270 billion ($359 billion), you’d think Tesla talisman Elon Musk had better things to worry about than engineering relatively meaningless, sharemarket sugar hits.
But while Musk is many things – genius, visionary and occasional ratbag – he’s also shown himself to be an expert in market psychology. And it’s through this prism that we should see Monday night’s announcement (via Musk’s favourite medium of Twitter, of course) that Tesla will ask its shareholders to vote to allow it to undertake its second stock split in two years.
Tesla shares surged 8 per cent on Monday night – adding $US84 billion, or more than the market capitalisation of General Motors – after the company tweeted its intention to pursue a stock split, following similar announcements in recent months from fellow tech giants Alphabet (parent company of Google) and Amazon.
A stock split is essentially a mind trick, given it changes absolutely nothing about the underlying value of the company.
When the price of a single share in a company gets very high – one Tesla share costs $US1091.84 at present, having risen a staggering 42 per cent within just two weeks – it can start to look out of the reach of retail investors. A 20-for-1 stock split at Tesla (as per Amazon and Alphabet’s recent proposals) would make each Tesla share worth $US54.59.
The idea is that Joan Bloggs suddenly feels like she has a chance to own a slice of the action at this lower price, she buys a few shares and, all of a sudden, the stock is rising.
Tesla’s jump on Monday night says there are many investors who believe the mind trick will work. But it should be noted academic research suggests the sugar hit from a stock-split announcement tends to be relatively short-lived, and many brokers already allow fractional ownership of stocks, meaning retail investors daunted by the high price of Tesla shares could already find a way to play the stock without outlaying four figures
Musk is a frequent tweeter and loves using the social media platform to lead his 79.4 million followers on a merry dance. He’ll hint at Tesla and SpaceX development plans. He’ll lash out at the Securities and Exchange Commission. Heck, he even used Twitter to infamously suggest he was about to take Tesla private in a deal that never happened – and landed him in just a little hot water.
While the Tesla stock split announcement didn’t come from Musk’s personal account, the market thinks it’s got his fingerprints all over it – for good or for ill.
Marc LoPresti, managing director of The Strategic Funds, welcomed the stock split, telling Bloomberg that Musk is “one of the masters of market psychology”.
But David Trainer, CEO of stock research firm New Constructs, accused the company of trying to make a stock whose “valuation is completely disconnected from fundamentals … even more attractive to unsuspecting retail investors”.
“This could further fuel the bubble in Tesla’s stock that has been brewing over the past two years,” he says.
Veteran tech analyst Dan Ives from Wedbush sees the stock split as “a smart strategic move that will be a positive catalyst for shares going forward”.
But Ives, who has a target price of $US1400 on Tesla (suggesting almost 30 per cent upside from here) also makes the case that Tesla’s fundamentals also look as strong as they have for some time.
Demand for electric vehicles is running hot and supply chain issues have been exacerbated by the war in Ukraine, pushing up EV prices and margins. Tesla has already lifted prices this year, with selling prices between 9 per cent and 28 per cent higher than a year ago and many in the market see its industry-leading automotive gross margin of 36 per cent pushing higher in the next few years.
With Tesla successfully opening its Berlin gigafactory last week, and planning the opening of its gigafactory in Texas next week, Ives says two of the bigger clouds that had been hanging over the company are dissipating.
“We believe demand is rapidly building for Tesla’s Model Y, with 2022 so far looking like another ‘breakout year’ for Tesla and the EV industry,” Ives says
“While logistical hurdles will be a near-term cost burden, we importantly believe Tesla has the potential to further expand its auto gross margin and profitability profile over the next 12 to 18 months, especially with more higher-margin cars being sold and produced in China.
“In a nutshell, Tesla has strong momentum into the rest of 2022 with the biggest overhang of Berlin and Austin opening/ramping now in the rearview mirror.”
Does Tesla’s valuation, which sits at more than 220 times earnings, still look baffling? Absolutely – and surging bond yields make the surge we’ve seen in the past fortnight even more incongruous.
Theoretically, rising rates should put pressure on long-duration stocks like Tesla and other tech giants. Lisa Shalett, Morgan Stanley’s chief investment officer in the US, said on Monday night that as the slope of five-year and 30-year US Treasury yield curve flattens dramatically “and other yield curves head toward inversion, the nascent rebound in mega cap tech stocks may stall. “We are not sanguine about stocks at current valuations and level of earnings expectations, to say nothing of the execution risk in the Fed’s new policy path.”
But even if Tesla’s valuation remains difficult to wrap your head around, Ives is right to point out that the fundamentals around Tesla’s position look strong, with supply, demand and market position all pointing to higher earnings over the next few years.
Could the combination of improving fundamentals and a psychology-driven stock split inflate the Tesla bubble to record levels? History says it would be dangerous to bet against the momentum Musk has built around this stock.