Better stock-split buy: Tesla vs. GameStop

The battle between the electric-vehicle powerhouse and the video game retailer is hardly a contest at all.

| More on:
Battle between ASX shares represented by 2 investors facing off short sellers

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This article was originally published on All figures quoted in US dollars unless otherwise stated.

Stock splits can be exciting events, right? They certainly draw attention to the splitting company, even if they don't necessarily move the stock price up.

Consider the fates of two would-be splitters, Tesla (NASDAQ: TSLA) and GameStop (NYSE: GME). Since announcing their respective share divisions in late March, the share prices of both have declined (GameStop by 13.2% and Tesla by 9.6%).

But softening share prices can often make companies more attractive. Let's see which of these contenders is the better buy opportunity right now.

A tale of two splitters

Tesla and GameStop aren't directly comparable as businesses, but they do share some similarities. Both have been criticized for the way they operate in the past and both have come close to bankruptcy at various points in their histories. The two companies are also the subject of constant, and sometimes frenzied, online discussion. This somewhat distorts the value of their stocks, as chatter and noise can knock a company's price around quite a bit.

Let's cut through the static and look at the fundamentals of the pair. Both operate in relatively high-cost and low-margin environments. Tesla cars require thousands of components, some rather expensive, and GameStop has to maintain a decent level of inventory and operate and staff brick-and-mortar stores. Earning a buck for the two companies, then, has been a challenge at times.

Electrifying growth for Tesla

Tesla is a recent arrival to the profit garage. Its bottom line has only recently been consistently in the black. It's managed to do this with a laser focus not only on EVs exclusively -- unlike slower-moving, auto-making competitors who are still beholden to the traditional internal-combustion engine -- but also because the "cool factor" is nicely baked into its vehicles. This is especially true with the popular, higher-end offerings such as the Model X SUV.

This is a business model expertly practised by Apple, whose iPhone line of products is still the premium smartphone line of choice for many consumers after 15 years. The beauty of this approach is that quality premium products command higher prices and, all things being equal, produce higher margins for their makers. That was a key factor in Tesla's dramatic lurch into profitability.

This success is combined with heady top-line growth. People want to own next-generation cars and desire to own Teslas. Demand continues to be bodybuilder strong and has helped lift revenue higher. Tesla's full-year 2021 sales were nearly $54 billion, a sky-high 71% improvement year over year.

Is it game on or off for GameStop?

During the coronavirus pandemic, GameStop grew to prominence because of the many online denizens posting feverishly about the company. For a time (and still to some extent these days), it was the company that personified the new term "meme stocks," with the outcome of entire trading days dependent on the tone of online discussions.

This kicked off in late 2020 with the most famous short squeeze in recent history. The shorts were ultimately routed, and GameStop began the roller-coaster ride it's still on today.

To be blunt, it's not a good investment based on the business fundamentals. While GameStop hasn't done badly squeezing out sales growth (18% in full-year 2021) lately, it's a retail dinosaur that usually loses money. Over the past four years, its annual loss has ranged from just under $215 million to nearly $800 million. Zooming in, the past three quarters have seen the flailing company slide increasingly deeper into the red on the bottom line.

And the winner is...

In one corner, we have Tesla as the highest-profitable operator in a red-hot segment in which demand shows no sign of cooling. In the opposite corner stands wobbly GameStop, weakened by a legacy business model that's hard to succeed with today and tough to pivot from. The company's also not a hot prospect to excel with behind-the-trend ventures, such as its recently announced non-fungible token (NFT) platform.

I suppose some argument could be made in favor of GameStop being far cheaper on certain, highly selected valuations. The company's price-to-sales ratio, for instance, stands at less than two, while that of ever-expensive Tesla is a bloated 24-plus.

Then again, Tesla is a zeitgeist company with its best years in front of it. GameStop is a gossip-prone, volatile stock fronting a money-losing business.

There's no real competition here. Admittedly, Tesla's valuations give me pause to think and its top management is a bit flaky for my taste, but it's built a powerful brand and will continue to be a leader in its segment. The EV specialist is unhesitatingly my pick in this contest.

This article was originally published on All figures quoted in US dollars unless otherwise stated.

Eric Volkman owns Apple. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended Apple and Tesla. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Apple. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on International Stock News

A man sits in casual clothes in front of a computer amid graphic images of data superimposed on the image, as though he is engaged in IT or hacking activities.
International Stock News

What did Nasdaq high flyers Tesla and Alphabet just report?

Nasdaq earnings season continues with Google-parent Alphabet and Tesla reporting overnight.

Read more »

A woman sits at her computer with her chin resting on her hand as she contemplates her next potential investment.
International Stock News

Nvidia stock has pulled back over 10%. Here's what history says could happen next

Nvidia has a 100% success rate of rebounding after pullbacks of 10% or more. Will this time be different?

Read more »

Digital rocket on a laptop.
International Stock News

Why Nvidia stock jumped on Monday

Nvidia investors got some big news, and the stock is also getting a boost thanks to bullish Wall Street analysts.

Read more »

a group of business people sit dejectedly around a table, each expressing desolation, sadness and disappointment by holding their head in their hands, casting their gazes down and looking very glum.
International Stock News

Why CrowdStrike stock just crashed again

There likely isn't a quick way to restore confidence.

Read more »

A man wearing a suit and holding an EV charger gives the thumbs up.
International Stock News

Why Tesla stock popped ahead of earnings day

Investors will soon see what Tesla's surprising Q2 sales volume means for the bottom line.

Read more »

A little Asian girl is so excited by the bubbles coming out of her bubble machine.
International Stock News

Opinion: This Nvidia forecast all but confirms that the artificial intelligence (AI) bubble will burst sooner rather than later

Nvidia's gross margin guidance points to pricing pressures that may signal an end to the irrational exuberance surrounding artificial intelligence…

Read more »

Hands reaching high for a trophy with a sunset in the background.
International Stock News

Is it too late to buy Nvidia stock in the second half of 2024?

The company has suffered from a recent sell-off, but maintains massive long-term potential.

Read more »

A white EV car and an electric vehicle pump with green highlighted swirls representing ASX lithium shares
International Stock News

Why Tesla could be the best 'Magnificent Seven' stock to own in the second half of 2024

Tesla's stock has been rallying of late, and there could be more gains to come in the weeks and months…

Read more »