P/E Ratio
The actual Tesla’s PE ratio for Quarter three 2020 is 781.06. This valuation level has generated debate whether the company is overvalued when compared with the respective ratios of its competitors. For a similar period, Toyota and General Motors, and BMW had PE ratio of 33.05, 12.90 and 12.51, respectively. These PE results show that the Tesla stock is overvalued, often as high as eight and more than twenty times that of its closest competitor. The higher valuation is despite the other close competitors moving higher units than Tesla each year. For example, consider the case of BMW, which sold more than 675000 units in quarter three of 2020 and has the lowest market capitalization, has a PE ratio of 12.51. However, some analysts and even Elon Musk have offered a different explanation for the valuation (Bromels, 2021) . Some analysts argue that the automaker should not be compared with other automobile companies.
The argument is that Tesla is a tech company, and the comparison should be against similar tech companies. Elon Musk alluded to that fact when releasing quarter 3 of 2020 results by indicating that the company competes against other tech startups in superchargers, battery cells and micro-chips business. A comparison of price to sales earnings of Tesla to the tech companies such as NIO, NVIDIA and Zoom Video shows a reasonable valuation. From quarter three earnings, Tesla’s price to sales earnings ratio is 13.97 while NIO and NVIDIA had 23.20 and 23.75, respectively (Bromels, 2021) . The use of price to sales earning percentage is because these companies are yet to generate profits, making the ratio most appropriate for comparison purposes.
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Tesla must grow profits faster enough to justify the high PE ratio, but the higher-than-normal PE ratio makes it difficult to justify. If the company cannot increase the profits faster enough to justify the current valuation, then the stock is overvalued (Constable, 2021) .
Book value of Tesla’s Share
Book value = (Total assets – total liabilities)/ Total Outstanding shares
Total assets: $52148000
Total Liabilities: $29073000
Therefore, $52148000 – 29073000 = $23075000
Number of outstanding shares according to 2020-year end results; 960000
Thus, book value = $23075000/ 960000
= $24.05 per share
As of May 6, 2021, the current share price is $663.54 per share (Yahoo finance, 2021) . The book value is lower than the market value. Therefore, the market apportions higher value to the share due to the projected higher profit earnings. The stock is also overvalued.
Analysts advise on the stock
The stock has attracted diverse opinions on whether it’s a buy or a sell, mainly due to its overvaluation, and different analysts have founded explanations for their advice.
Ryan Brinkman, an analyst at JP Morgan, rates Tesla’s stock a sell at a price target of $155. His argument is based on Tesla’s valuation. The company’s share by the end of April 2021 traded at $716 with a market capitalization of $687billion and a one-year stock return of 342%. Also, expected growth in twelve months is 97%. The shares traded at 83 times the projected earnings of 2021. Ryan’s argument is to warrant the valuation; Tesla has to sell more vehicle units, innovate and introduce more models in the market, and consistently report higher profits from the sale of electric vehicles. Any flaws in innovation strategy execution, slippage in new model production timelines and a dip in profits might result in investor disappointment and hurt the share price (Root, 2021) . Therefore, the risks of any stumbles and slippages are not adequately represented in the current share price.
Craig Irwin of Roth Capital rates the stock as a hold because of the doubts about the sustainability of the company’s credit selling business in future. Tesla sells zero-emission credits to other automakers who manufacture the traditional gas-powered vehicles and offset their carbon emissions. The business generated $2.5billion for Tesla in the last two years. Craig indicates that as the other automobiles start producing electric and other zero-emission cars, the value of Tesla’s credit will drastically fall (Root, 2021) . As such, current investors should hold on to the stock.
Jonathan Dorsheimer of Canaccord Analysts recommends buying the stock. The stock price is high, so the buyers have continued to believe that Tesla can be much more than an automobile company. Tesla has various other businesses, including battery making, manufacturing solar panels, and selling software and related services. Thus, the company’s prospects are positive, and its stock price will reflect that in future. Jonathan predicts the price to hit $1071 from the April 2021 price of $786 (Root, 2021) . A definite buy.
References
Bromels, J. (2021). Is Tesla Stock Overvalued? | The Motley Fool . The Motley Fool. https://www.fool.com/investing/2020/11/05/is-tesla-stock-overvalued/ .
Constable, S. (2021). Yes, Tesla Stock Is Overvalued . Forbes. https://www.forbes.com/sites/simonconstable/2021/02/16/yes-tesla-stock-really-is-overvalued/?sh=4a00f2534262 .
Root, A. (2021). Read This Before You Buy Tesla Stock . Barrons.com https://www.barrons.com/articles/should-i-buy-tesla-stock-everything-you-need-to-know-about-the-ev-company-51618965083 .
