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Stock split may further fuel Tesla stock bubble: strategist
29 Mar 2022
Tesla (TSLA) shares are rallying after the company disclosed plans for a stock split on Monday. But one strategist isn’t convinced the fanfare will last very long among investors.
The move threatens to further inflate what some stock-watchers believe is a market bubble in the making for Tesla when the stock split dramatically reduces its share price and “unsuspecting” retail investors inevitably pour in, David Trainer, CEO of the investment firm New Construct, argued in reaction to the news.
Moreover, Tesla’s plans to pursue a stock split (which if approved, would mark the second time in nearly two years) does not change the fact that shares are trading at a valuation “completely disconnected from fundamentals,” Trainer said.
The electric-vehicle giant revealed in a tweet Monday — and later confirmed by filing plans with the Securities and Exchange Commission (SEC) — that Tesla would request shareholder approval at its annual meeting to split the company’s stock so it can pay a special dividend to investors.
Tesla’s announcement sent shares soaring as much as 8% in intraday trading Monday. The stock was up 6.3% as of 12:17 p.m. ET to trade at about $1,074.48 per share.
According to Trainer, the resulting reduced price on Tesla from the split could drive investors looking to capitalize on the opportunity to buy and fuel what he perceives as a bubble, when shares of a stock skyrocket in price but is out of proportion to the company’s fundamental value.
The plan to seek shareholder approval on a stock split comes as Tesla faces increasing competition from legacy automakers rushing into the electric vehicle market. Trainer also said that Tesla must sell well over 16 million cars per year in order to justify its current stock price of over $1,000 per share, while it only sold about 1 million cars in 2021 and is nowhere near producing enough cars to justify that price level.
A recent shutdown of its Shanghai factory for four days as the city prepares for a COVID-related lock down may also impact production as the company already grapples with a series of headwinds from supply chain snafus. A one-week shutdown and subsequent weeklong restart on production could see the factory lose around 17,300 units of production based on the Giga Shanghai’s theoretical output of 450,000 vehicles a year.
Elon Musk attends the opening ceremony of the new Tesla Gigafactory for electric cars in Gruenheide, Germany, March 22, 2022. Patrick Pleul/Pool via REUTERS
Elon Musk attends the opening ceremony of the new Tesla Gigafactory for electric cars in Gruenheide, Germany, March 22, 2022. Patrick Pleul/Pool via REUTERS
“We advise investors to sell the rally in Tesla shares, as the stock faces no fundamental upside catalysts,” he said, adding that nearly every major automaker has a significant electric vehicle production strategy in the works to compete with the electric-car pioneer. “Tesla's first mover advantage in the electric vehicle space is fading fast.”
Tesla announced its first stock split, a 5-for-1 offering, in August 2020. Shares were trading around the $1,300 level at the time of the previous stock split announcement and pushed to $2,000 following the news to bring the market cap above $400 billion
The type of stock split Tesla will propose to shareholders at its next annual meeting, likely to be held in June, remains unclear.
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