Long-term assumption reinforced by the stock split


You’re here (TSLA) is the largest automaker in the world by market capitalization, but where does it stand today? Tesla shares shed about 9% on Friday after Musk shared concerns about the economic collapse with employees. TSLA stock suffered another blow on Monday and fell 4.8%. These shocks, however, will have little impact on Tesla’s long-term growth.

Growth stocks such as TSLA continue to struggle as inflation rates continue to rise. High inflation has resulted in the highest interest rates in years, leading to a healthy increase in the cost of auto loans.

The Oracle of Omaha, Warren Buffet, has repeatedly mentioned that “interest rates act as gravity on asset prices”, which happens to be the cause of the TSLA’s suffering.

Nevertheless, Tesla has been one of the greatest automotive companies. It has consistently outperformed the market and been the pick of EV stocks. Over the past five years, its revenue has grown by more than 53.44% with a healthy increase in profits. Results have also been exceptional lately, with a year-over-year sales improvement of more than 73%. Additionally, its free cash flow margin also improved to triple digits.

However, is inflation the only reason why TSLA has fallen? Or is there more to the stock’s downside than just high inflation and higher interest rates? We’ll take a look.

On TipRanks, TSLA scores 2 out of 10 on the Smart Score spectrum. This indicates high potential for the stock to underperform the market as a whole.

Employee layoffs – Bad news for Tesla

The news website, Electrek, has acquired a leaked email that Musk shared with company employees. The email showed that Tesla had had a “difficult quarter” and that the company planned to cut its workforce by 10%.

The email also mentioned that the company plans to “suspend hiring worldwide,” implying that Tesla will significantly reduce the thousands of open positions it advertised when the email was sent.

On the other hand, it is interesting to note that Tesla is not new to layoffs. The company reduced its workforce by 7% in 2019 and managed to maintain incredible growth. Given how Tesla handled the layoffs earlier, it’s likely the company could benefit from the downsizing.

Along with that, China’s decision to extend the lockdown has created supply chain issues for Tesla, and Musk is obviously ringing the panic button for the US economy. However, the company is confident that China will ease the lockdowns that will correct the imbalance between supply and demand.

A better future

Recently, Tesla submitted an annual proxy statement and released its 3-for-1 stock split proposal. The stock split is intended to make it easier for employees to pick up shares of the company. Additionally, Tesla believes the move will reset the common stock price and make it more accessible to individual traders.

Many companies use stock splits when stock prices are exorbitant, as in the case of Tesla. TSLA stock had traded at a nosebleed valuation, making it nearly uninvestable. The recent market downturn has reduced EV market scum, and the stock split will further reduce the stock price to more attractive levels.

Additionally, Musk plans to use Tesla shares to acquire Twitter and reduce his stake in the company to increase funding. The stock split will have little to no impact on Tesla’s fundamentals, but it will allow investors to buy the stock by stabilizing the stock price.

The Taking of Wall Street

As far as Wall Street is concerned, TSLA stock remains on a moderate buy rating. Out of 30 total analyst ratings; 16 buy ratings, eight hold ratings and six sell ratings have been assigned in the past three months.

The average TSLA price target is $917.10, implying an upside potential of 38.39%. Analyst price targets range from a low of $67 per share to a high of $1,580 per share.

Bottom Line – Is Tesla a Buy?

Tesla is expected to increase sales and experience rapid growth over the next 12 months. In the first quarter of 2022, Tesla made earnings per share of $3.22, with sales up 81%. Moreover, with the substantial drop in its share price, it offers an attractive risk/return ratio.

Along with supply chain issues and Musk’s rocky Twitter acquisition saga, volatility in the US economy has affected TSLA. Also, its high price multiples didn’t help either. Nonetheless, the long-term bullish case for the EV titan remains intact.

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