Splitting shares
In a proxy statement filed after the market closed last Friday, Tesla revealed its plan for a three-for-one stock split in the form of a stock dividend.
The company will ask shareholders to vote on this plan at its annual meeting in August.
A split doesn’t change a company’s underlying fundamentals, but it can have meaningful consequences.
By splitting a share into smaller pieces, each piece will have a lower, more accessible price. Those bite-size shares often draw more interest from retail investors.
Since 1980, S&P 500 companies that have announced stock splits have returned an average of 25.4% over the following 12 months, according to Bank of America. Compare that to the S&P 500’s average return of 9% over the same period.
In fact, the bank says that after a split is announced, these stocks also outperformed the benchmark index in the three- and six-month periods as well.
“Underlying strength in the company is a primary driver of elevated prices,” Bank of America analysts wrote in a note to investors earlier this year.
“Once the split is executed, investors who have wanted to gain or increase exposure may start to rush for the chance to buy.”
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Learn MoreNot standing still
Although Tesla’s share price performance has been disappointing this year, its business remains on the right track.
In Q1, the company delivered 310,048 vehicles, representing a 68% increase year-over-year. Production totaled 305,507 vehicles, up 69% from a year ago.
And there were strong improvements across several important financial metrics.
For the quarter, Tesla’s automotive revenue surged 87% year-over-year to $16.86 billion. Total revenue grew 81% to $18.76 billion.
The company’s operating income rose more than 500% from a year ago to $3.6 billion, and its operating margin expanded a whopping 1,349 basis points to 19.2%.
In fact, it was a record quarter for Tesla in terms of vehicle deliveries, revenue, operating profit and operating margin.
More: Is buying a Tesla worth it?
More upside ahead for Tesla?
Contrarian investors are always on the lookout for a growing company with a beaten-down share price.
And several Wall Street firms continue to see material upside in Tesla stock.
On June 1, Goldman Sachs analyst Mark Delaney reiterated a “buy” rating on Tesla. While Delaney lowered his price target from $1,200 to $1,000, the new target is still 54% above where the stock sits today.
Meanwhile, Morgan Stanley analyst Adam Jonas has an “overweight” rating on Tesla shares and a price target of $1,300. That implies a potential upside of over 100%.
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