Tesla is one of the most actively traded stocks in the market. It’s one of the most expensive by various measures. Is it overvalued?
This article will address the question by comparing Elon Musk’s company with other major car makers. It will use common financial ratios and real-world numbers so you can make your own decision about Tesla shares.
|Price / Revenue||23x||0.7x||0.4x|
|Expected Revenue Growth||55%||13%||13%|
|Cars Sold / Year||500,000||6.8M||4.2M|
Tesla Valuation: Market Cap
Tesla is the most valuable automaker by far. Its market capitalization (stock price times shares outstanding) of $629 billion ranks it sixth among companies on the U.S. stock market. The electric-car company is worth almost 8 times GM and nearly 13 times F.
However, TSLA has a much cleaner balance sheet because it carries just $13 billion of debt. GM and F, in contrast, have over $100 billion of debt each. Market cap therefore understates the true value of GM and F.
This is where stock market investors often use “enterprise value” to judge the size of a company.
Enterprise Value = Market Cap + Debt - Cash
By this measure, TSLA is worth roughly 4 times General Motors and Ford Motor.
Tesla Valuation: Price / Earnings Ratio
The price / earnings ratio, or P/E, is one of the most common measures of valuation in the stock market. This is simply a company’s per-share earnings divided by its stock price. Using P/E ratio, Tesla is dramatically more expensive than other car makers like GM and Ford.
Tesla trades for more than 1,000 times historic earnings, and 161 times estimated future earnings. That’s more than 10 times the related numbers for its gasoline-powered rivals.
Price / sales, or price / revenue, is another valuation metric. Tesla trades for 23 times sales, which is the eighth-highest ratio for all members of the S&P 500 index. GM and F, on the other hand, trade for less than 1 time revenue. But this measure, Tesla is worth over 20 times more.
Cash Flow Generation
Aside from earnings, analysts can also use cash flow to value Tesla shares. Cash flow adjusts net income to remove accrual accounting mechanisms and gains from investing activities. Analysts can also use cash slow to compare stocks prices.
Tesla’s valuation is about 208 times cash flow by this measure. GM trades for less than 5 times cash flow and F trades for about 7 times.
Is Tesla Overpriced?
One major reason why Tesla is valued so much higher than its peers is growth. The electric-car maker increased its sales by 45 percent last year. Wall Street analysts anticipate another 55 percent of upside this year.
GM’s sales rose just 22 percent last year, while F shrank by 10 percent. They’re both expected to grow about 13 percent this year.
Tesla Valuation: Stores and Units
Investors can also use non-financial measures to compare Tesla with other car makers. How many cars does it sell? How many locations does it have to reach customers?
By this measure TSLA is also much more expensive than peers. It operates only 130 physical stores in the U.S. That’s less than 1/30th GM’s footprint and 1/20 F’s reach.
|2020 Change||YTD Change|
TSLA overcomes part of this with a strong online sales model. However, it may create a potential risk over time. Traditional auto makers have much wider distribution and marketing networks across the country. This could get let them get in front of a lot more customers very quickly once they start rolling out more electric models.
In conclusion, Tesla shares have high valuations based on measures like P/E ratio and price/sales. This mostly results from its strong growth versus traditional automakers like GM and F. Tesla outperformed in 2020 but is lagging this year after as investors shift to value stocks. The big question over the long term is whether TSLA’s will keep growing so quickly — especially when competition increases.
This article was written by David Russell, TradeStation Securities, Inc., part of the Monex Group Inc, published on 08/04/2021.
David Russell is VP of Market Intelligence at TradeStation Group. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.