Will a Second Tesla Stock Split Spark Another Rally?

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Tesla (TSLA, $1,010.64) on Monday signaled its second stock split in less than two years and became the third company in the trillion-dollar market cap club to propose a split in the past couple of months. Shares in the electric vehicle maker predictably popped at the opening bell.

The company's notice of a Tesla stock split follows Amazon.com's (AMZN, $3,295.47) proposed 20-for-1 AMZN stock split announced earlier this month, as well as Google parent Alphabet's (GOOGL, $2,833.46) 20-for-1 GOOGL stock split disclosed in early February.

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Tesla's announcement came in a regulatory filing that was light on details, but that didn't stop shares from adding well more than 6% in the first 15 minutes of trading.

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Fair enough. The last time Tesla split its stock, TSLA shares gained more than 80% between the early August 2020 announcement and the day the 5-for-1 split went into effect at the end of that month:

Performance chart of Tesla post-stock split in 2020

If shares don't go quite as crazy this time around, that will be understandable. After all, TSLA actually said very little in its filing.

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Here's the deal: The company plans to request stockholder approval at its upcoming annual meeting "for an increase in the number of authorized shares of common stock … in order to enable a stock split of the Company's common stock in the form of a stock dividend."

That's it. The date of the annual meeting has yet to be disclosed, but in 2021 it was held in October, if that's of any help.

The almost certain outcome, however, is that the Tesla stock split will make shares more accessible to retail investors who currently balk at the four-figure sticker price. True, brokers are happy to sell their clients fractional shares for free, but a stock with a high dollar price is simply tougher for traders, investors and insiders to sling around.

Slicing the price of admission to any stock helps increase liquidity and volume. Those are not necessarily bad things. Just be aware that volatility will likely increase as a result, too.

The Last Split Triggered Buying. Will History Repeat?

The downside to stock splits is that a company's stock usually goes up even though nothing under the hood has changed. A stock split is essentially the same thing as making change: swapping, say, a $5 bill for five $1 bills. A company's fundamentals, its prospects and its shares' valuation remain the same.

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That's why some strategists are telling investors they should take any pop from the Tesla stock split as a chance to get out while the getting is good.

"Tesla's desire to pursue a stock split doesn't change the fact that its stock is still trading at a valuation completely disconnected from fundamentals," says David Trainer, CEO of New Constructs, an investment research firm based in Nashville.

Trainer fears that by dramatically reducing its price post split, TSLA will become 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 adds. "We advise investors to sell the rally in Tesla shares, as the stock faces no fundamental upside catalysts."

For context, here's how TSLA stock has fared against the S&P 500 over the past two years:

Tesla vs. S&amp;P 500 performance chart for past two years

After a 900% run vs. just 86% for the border market over the past couple of years, Trainer isn't alone in his concerns. Wall Street gives TSLA stock a consensus recommendation of Hold, per S&P Global Market Intelligence. A number of less optimistic or even bearish analysts do cite valuation as a major worry.

Indeed, Tesla's stock trades at nearly 95 times analysts' fiscal 2022 earnings per share (EPS) estimate. True, the Street forecasts the company to generate average annual EPS growth of almost 40% over the next three to five years, but TSLA still commands a pretty hefty premium. That's especially true if you buy the bears' argument that an onslaught of electric vehicle industry competition isn't being adequately priced into TSLA shares.

Here's the pros' bottom line: Of the 35 analysts issuing opinions on Tesla stock surveyed by S&P Global Market Intelligence, 11 rate it at Strong Buy, six say Buy and nine call it a Hold. Notably, TSLA also gets six Sell recommendations and three Strong Sells.

Sell calls are remarkably rare on the Street, so make of that what you will.

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Dan Burrows is Kiplinger's senior investing writer, having joined the publication full time in 2016.

A long-time financial journalist, Dan is a veteran of MarketWatch, CBS MoneyWatch, SmartMoney, InvestorPlace, DailyFinance and other tier 1 national publications. He has written for The Wall Street Journal, Bloomberg and Consumer Reports and his stories have appeared in the New York Daily News, the San Jose Mercury News and Investor's Business Daily, among many other outlets. As a senior writer at AOL's DailyFinance, Dan reported market news from the floor of the New York Stock Exchange.

Once upon a time – before his days as a financial reporter and assistant financial editor at legendary fashion trade paper Women's Wear Daily – Dan worked for Spy magazine, scribbled away at Time Inc. and contributed to Maxim magazine back when lad mags were a thing. He's also written for Esquire magazine's Dubious Achievements Awards.

In his current role at Kiplinger, Dan writes about markets and macroeconomics.

Dan holds a bachelor's degree from Oberlin College and a master's degree from Columbia University.

Disclosure: Dan does not trade individual stocks or securities. He is eternally long the U.S equity market, primarily through tax-advantaged accounts.