Is Tesla Overvalued?

Tesla is such a controversial topic amongst investors, if you are looking to inspire heated debate among investors, you can always try your luck by bringing up Tesla. Everything about Tesla seems to be controversial, from their CEO to the design of their vehicle and now even to their stock price. Despite this, is Tesla overvalued? Seems like an easy question and a yes or no should suffice, but it is not so clear-cut. Depends on the angle you are looking at it from and it also depends on who you ask. If you answer by looking at the numbers then it is difficult not to jump to a conclusion.

No, it’s not.

Tesla as a company do not argue that they are not overvalued but they argue that you cannot compare them to other automakers. For Tesla, sales are over the moon and it keeps growing in leaps and bounds, and the higher their sales the higher their value, so inadvertently you are getting value for your money. It’s not uncommon for a fast-growing company to have a much higher valuation than a recognized player in a given industry.

Tesla also comes in strong with another point that they are not just any automaker but they are also a tech company and they should be valued against other tech companies and not just automakers. Tesla’s CEO also agrees with this point by saying “There’s an excess of a dozen start-ups effectively in Tesla,” including developers of microchips, battery cells, superchargers, and autonomous driving technology.

True to their argument, when Tesla’s value or their price to sales ratio is compared with the tech sector, it is concluded that their valuation seems more reasonable and acceptable.

Advertisements
Advertisements

Time will tell

Like we have said it is not a straightforward answer. Tesla has its advantage over many of its other competitors in the electric vehicle space. First, it has been producing electric cars for a long time and therefore they have experience with innovative technology, they have experimented with different designs, and understand the supply chain. They also have a major advantage in terms of technology and patents.

However, their competitors are not backing down. They are coming up fiercely, they are also getting creative with new electric vehicle start-ups and established auto companies and they are about to bring a flood of battery-electric vehicles to the market. So, we will be on the lookout for what Tesla’s competitors are up to.

No doubt Tesla is richly valued, but whether you think it is overvalued is dependent on the type of growth you intend to see in Tesla Vehicles sale, their technological advancement, and the development and sales of the company’s non-vehicle products.

You can come up with different scenarios to rationalize the value, but it is never as it seems. The industry is a fast-growing one and there are far too many. However, Tesla’s growth potential undoubtedly earns it a higher valuation than a legacy car company. That said, much growth appears to have been priced into the stock, which has a history of not moving in lockstep with the company’s fundamentals.

The bottom line is that value investors should probably stay away, and even growth investors should be aware that not everything will go as planned.

Yes, it is?

Apart from incomes, experts can also use cash flow to value Tesla shares. Net income is adjusted for cash flow to exclude accrual accounting strategies and benefits from investing. Analysts can also make use of cash slow to compare stock prices.

Another reason why Tesla is valued way much higher than its competitors is their growth, the electric car company augmented its sales by almost 45% and wall street analysts are expecting this to increase to 55%. Compared to their competitors which only increased by 22% and 10% and if they are to further increase, analysts are looking at a 13% increase for their competitors compared to that of Tesla’s.

One of the most common indicators of stock market valuation is the price/earnings ratio, or P/E. Simply put, this is a company’s earnings per share divided by the stock price. Using the P/E ratio, Tesla is dramatically more expensive than other car makers like GM and Ford.

Tesla sells for more than 1,000 times historic earnings, and 161 times projected future earnings. That’s more than 10 times the related numbers for its gasoline-powered competitors.

Tesla Valuation: Stores and Units

Stakeholders can also use non-financial processes to judge Tesla with other carmakers. For instance, measures like How many cars does it sell? what is the number of locations it has for reaching customers?

In order to attract consumers, how many locations does it have?

TESLA is also significantly more expensive than its peers in this regard. It has only 130 physical locations in the United States. That is less than 1/30th the footprint of General Motors and 1/20 the reach of Ford.

Tesla overcomes part of these measures because they have a strong online presence and they make sales online as well. However, it may create a potential problem for them in the long run because traditional automakers have much wider distribution and marketing networks across the country. This could help them rapidly expand their customer base once they begin rolling out additional electric models.

Conclusion

Tesla shares have high valuations but not without reason. This comes as a result of their growth compared to other traditional automakers like GM. In 2020, Tesla outperformed but this year (2021), it is lagging as some investors have shifted to value stocks.

 

Questions to keep in mind are;

-Will Tesla keep growing?

– Will their competitors surpass them?

-Will they be able to maintain the standard they have?

-Will keep setting the bar so high that their competitors will have to try so hard to beat them?

There is no right or wrong answer, but before you make up your mind make sure you have analyzed all the variables and your argument is not just one-sided.

 

 

Advertisements
Advertisements
Advertisements