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Market Insights

Stock of the week: Tesla

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Tesla’s rapid development continues. The electric-vehicle maker delivered 310,048 cars in the first quarter of 2022, a new sales record for the company. That compares to 184,800 delivered in Q1 2021.

Musk Tweeted:

“This was an exceptionally difficult quarter due to supply chain interruptions & China zero Covid policy. Outstanding work by Tesla team & key suppliers saved the day.”

This progress is notable, although it could be hard-pressed to move Tesla’s stock price as much as the potential stock-split news did last week: Tesla Motor

Why is a stock split a potentially positive catalyst?

There’s nothing to indicate that a stock split should change anything. Simplified, a stock split is just dividing the same pie into smaller pieces. If a company issues 100 shares and each is worth $1, then the market cap of the firm is $100. If the same company decides on a 10 for 1 stock split, each share is then worth $0.10, but every prior shareholder now has 10 shares for every 1 they held previously.

The new maths is 1000 shares x $0.10 = $100 market cap. Nothing has changed.

However, there may be a psychological perspective in play. When Alphabet (Google) announced a 20:1 stock split earlier this year, the firm explained that “The reason for the split is it makes our shares more accessible,”.

Bloomberg reported the development as “Aimed at Bringing Google Shares to Masses”.

Perhaps it’s as simple as price playing a role in the perception of value. Ed Clissold, chief U.S. strategist at Ned Davis Research summed up this idea in the article:

“Institutional investors can buy in size and the price per share doesn’t matter,”

“But for a smaller investor, a lower price-per-share makes it easier for them to buy a reasonable number of shares.”

Back to the everyday business, Tesla’s gigafactory in Shanghai has been impacted by Covid lockdowns, although overall production capacity is increasing.

Tesla’s Berlin gigafactory is up and running now. Wedbush analyst Daniel Ives noted that "The Berlin factory establishes a major beachhead for Tesla in Europe with potential to expand this factory to production of ~500K vehicles annually with Model Y front and center over the coming 12 to 18 months."

In the US, Tesla’s Austin gigafactory is set for an invite-only opening party on April 7th, further increasing the company's production capacity.

As well as serving as Tesla’s corporate headquarters, Austin is expected to become the main production facility for the Tesla Semi and Tesla Cybertruck.

Tesla fans got a bit of a shock when news circulated that the cybertruck had been cancelled, but it was just an April fools’ joke. .

So, production is increasing, but valuation concerns are ever-present. Tesla stock trades at a price-to-earnings (P/E) ratio of 219, and 347 times free cash flow…

Not investment advice. Past performance does not guarantee or predict future performance.

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