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New fair values for Apple, Tesla after stock splits

Susan Dziubinski  |  01 Sep 2020Text size  Decrease  Increase  |  
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Both Apple (AAPL) and Tesla (TSLA) began trading on a post-split basis today.

Nothing fundamentally changes with a company when it splits its stock; its market capitalisation remains the same, too. Companies usually split their stocks in an effort to make their share prices more attractive to individual investors, who may be put off by a too-high stock price.

But in today's market, splits seem unnecessary, says Morningstar senior editor Ruth Saldanha.

"These recent high-profile splits seem superfluous given that most brokerage platforms now enable trading in fractional shares," she argues.

Below, our analysts share Morningstar's post-split fair value estimates for both stocks.

4-for-1 stock split doesn't alter our view that shares of Apple look expensive

"With the start of trading on 31 August, Apple will have initiated a 4-for-1 stock split that does not change our fundamental valuation of the company. The split had been announced during its most recent earnings call in late July. Based on our pre-split fair value estimate of $285 per share, our split-adjusted fair value estimate starting 31 August is now $71 per share. While the split will make shares seem more affordable for small investors, we note the market cap and our overall valuation of the firm remain unchanged. While narrow-moat Apple remains well positioned in the near term given the upcoming 5G iPhone and stronger outlook for the Mac and iPad segments owing to the ongoing work- and learning-from-home dynamics, we recommend that prospective investors wait for a wider margin of safety given the precarious state of the global economy, particularly as shares have appreciated more than 125 per cent from mid-March lows."

- Abhinav Davuluri, strategist

Tesla's robotaxi potential still does not justify its valuation

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"After adjusting our fair value estimate for Tesla's 5-1 stock split, effective after the market closed on 28 August, it is now $173, down from $865 before the split. Our diluted share count is 1.035 billion. We add in the present value of what Tesla's autonomous vehicle ride-hailing (robotaxi) business could be worth in 2030, and value it discounted at about $13.8 billion. This figure assumes Tesla captures 10 per cent robotaxi share across the combined markets of the United States, European Union, and China, and charges $0.25 a mile. Our weighted average cost of capital is 8.8 per cent, and our midcycle operating margin is 11.0 per cent. We expect the company to remain a leader in autonomous technology and range. Tesla is also gaining scale, and its ability to make desirable vehicles while generating free cash flow and net profit is far better than it's ever been, in our opinion."

- David Whiston, strategist

is director of content for Morningstar.com.

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