Yesterday, Tesla (TSLA Quick QuoteTSLA - Free Report) jumped more than 8% on news of a planned stock split, subject to shareholder approval. This would be the company’s second stock split in less than two years. Shares have been on a massive run since then, with the electric vehicle (EV) king joining the elite $1-trillion club in October 2021. Taking this trillion-dollar market cap company — currently trading near $1,100 — to a more digestible nominal figure per share would open the doors for retail investors who are a little tighter on the budget to own the stock.

TSLA the Latest to Join the Recent Stock Split Spree

Per the latest SEC filing, Tesla would request shareholder 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.”

The stock split news comes as a pleasant surprise, with Tesla following the footsteps of big tech giants like Amazon (AMZN Quick QuoteAMZN - Free Report) and Alphabet (GOOGL Quick QuoteGOOGL - Free Report) , which recently made similar announcements.

On Mar 9, Amazon declared a 20-for-1 common stock split for the first time in more than two decades. The meeting to procure stockholder approval for the stock split will be held in May 2022. If approved, each Amazon shareholder will receive 19 additional shares for every share held from early June 2022. Last month, Alphabet announced a similar stock split of 20-for-1, which is subject to shareholder approval, post which each stockholder of record as of Jul 1, 2022, will receive a dividend of 19 additional shares on Jul 15, 2022.

The split might aid AMZN and GOOGL in earning a spot in the Dow Jones Industrial Average and would make the shares of these multinational tech giants more attractive to retail investors.

Behind TSLA’s Stock Split

It’s no secret that Tesla’s valuation has skyrocketed over the last several years, causing the share price to become a large barrier to entry for everyday investors. To address that, the EV giant announced a 5-for-1 split back in August 2020 due to its insanely high valuation, opening the gates for many more buyers and significantly increasing volume.

Riding on the back of record sales, Tesla’s 50% share price increase in 2021 has been more than enough to outpace the S&P 500’s 27.6% return. However, similar to the rest of the market, the share price of Tesla has witnessed volatility lately amid macro-economic factors including concerns of galloping inflation, higher interest regime and further deterioration of the already devastated global supply-chain system due to the Russia-Ukraine geopolitical conflict. On Feb 24, TSLA touched $700.39 (the lowest point of 2022 so far) but ended the session higher at $800.77. Since then, the stock has risen 36% despite being visibly shaken by weeks of volatility.

While Tesla has been lighter on details in the latest SEC filing and hasn’t announced the split ratio yet, the stock still managed to pop up 8% yesterday. Although a stock split would not fundamentally alter anything about the company, shares post stock split become accessible to a larger number of small-budget investors who are currently balking at the four-figure sticker price. Also, it would grant employees a higher degree of flexibility within stock-based compensation.

What could be the split ratio this time?

Going by the company’s one and only stock split in 2020, Tesla was trading at a pre-split adjusted price of $2,213.4 per share while closing at $498.32 on Aug 31, 2020 after the split came into effect. Currently, the stock is trading at $1,100 a share level. If the company wants to bring the shares down to a similar level this time as well, it would denote just a 2:1 split. However, there’s a fair chance that TSLA could split its stock much more than that if we take some cues from GOOGL and AMZN’s recent stock split announcement.

Both GOOGL and AMZN had been hovering around $3,000 levels when they announced their stock split ratio of 20:1. The stock split, subject to shareholder approval, would lower the stock price of both the companies to nearly $150 a share. If at all that’s any indication and Tesla also wants to bring its stock down to close to $200 a share, TSLA may again go in for a 5:1 split ratio (or something close to that) this time as well.

Well, Tesla’s share price has long been divorced from the company’s fundamentals. The firm’s lofty valuation levels — more than 100x P/E — is a proof of the same. As an auto manufacturer delivering roughly a million cars per year, it would need to increase production by 16 times to reach fair value. But then again, Tesla is not just any other auto manufacturer but also a battery/ software developer, a solar tech company and an innovation powerhouse. In fact, TSLA is often labeled by many as a tech company.

Considering the solid upside potential that the company holds, it could make more sense for Tesla to go for a higher stock split ratio than the most common ratios of 2:1 or 3:1. But whatever the ratio, it would open up ownership to a wider spectrum of investors, which theoretically would drive the share price.

Buy TSLA Now

It should be noted that shares of TSLA gained an astounding 75% in the period between Aug 11, 2020 (when the company first made its stock split announcement) and Aug 31, 2020 (the day the split came into effect). The surge had been predicated by nothing but the anticipated stock split and 'fanboy' momentum.

While one should not expect a similar level of share price appreciation leading to the stock split this time, but the news would certainly provide a near-term boost to the share price. The split announcement is also a bullish signal from the management about the company’s upbeat prospects.

Tesla has transformed into one of the most popular and widely regarded stocks in the market. The EV space has been rapidly evolving, and companies have been clamoring to get a piece of the pie. Tesla is a pioneer within the industry that is miles ahead of any other EV producer, rakes in more revenue each quarter and has a very high expected long-term earnings growth rate of 38.9% (versus the industry’s 28.3%). 

There are several bullish catalysts surrounding the firm. TSLA is riding on the robust demand of Models 3 and Y. Despite the global chip crunch, Tesla’s vehicle deliveries jumped 90% in 2021, aiding the top-line growth. In the last reported quarter, Tesla hit an incredible milestone with record deliveries and production. Most importantly, gross margin — excluding credits — came in at +29.2%, an all-time record high. 

Along with high automotive revenues, Tesla’s energy generation and storage revenues are also growing, thanks to the positive reception of Megapack and Powerwall products. Progress of the firm’s two new gigafactories is on track. Production at both Gigafactory 4 (in Berlin) and 5 (in Austin) commenced in the fourth quarter of 2021.

Although the rising COVID-19 infections in China have sandbagged Tesla’s operations in the world’s biggest EV market, with the company being forced to suspend operations again for the second time this month, these are just temporary roadblocks. Tesla’s deliveries, revenues and margins have been consistently improving over the past couple of years and the trend is likely to continue.

We believe that the stock split will bring in heavy trading volume and many new buyers. Given the tailwinds, Tesla appears poised for stock price appreciation and would be a great addition to your portfolio now, even amid high valuation levels. The stock currently carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.