Is Tesla Stock Overvalued?

The high electric automobile manufacturer has a sky-excessive valuation. How significant is simply too significant?

John Bromels

Nothing inspires heated debate among investors cherish Tesla (NASDAQ:TSLA). From its controversial CEO, Elon Musk; to the designs of its automobiles (severely, what’s up with the Cybertruck?); to easy questions about its balance sheet — each person looks to bear a sturdy notion relating to the field’s ideal carmaker by market cap. 

For now, let’s idea at one amongst the ideal questions for investors taking into account of making an strive to search out Tesla shares: Is Tesla overvalued? It sounds cherish a straightforward ask, but there’s more to it than meets the note.

A pair of hands holding paper currency in front of a car's steering wheel.

Image supply: Getty Pictures.

Yes, it’s miles

At the same time as you happen to reliable idea at Tesla’s raw numbers, it’s laborious not to return to the conclusion that the firm is approach overvalued. 

Let’s idea at basically the most classic valuation metric: the payment-to-earnings ratio. For reliable measure, we might perhaps test out the endeavor payment-to-EBITDA ratio and the payment-to-gross sales ratio. Here’s how Tesla compares with other important automakers, along side No. 2 Toyota (NYSE:TM), General Motors (NYSE:GM), and opulent carmaker BMW (OTC:BAMXF):

TSLA PE Ratio Chart

TSLA PE Ratio recordsdata by YCharts.

Thought to be such a gadgets isn’t cherish the others, am I apt? Tesla’s valuation metrics are between eight and 23.6 conditions those of its nearest competitor by every metric (lower is greater). That’s despite those other carmakers selling vastly more automobiles than Tesla does; even BMW, the smallest by market cap, delivered 675,680 automobiles in Q3 2020, nearly 5 conditions as many as Tesla’s 139,300.

Any approach you chop it, Tesla looks to be like obscenely overvalued.

No, it’s not

Tesla bulls construct not dispute that, when put next to other automakers, Tesla’s valuation is insane. On the opposite hand, they argue, Tesla mustn’t be when put next to other automakers. 

For one aspect, Tesla’s gross sales are rising by leaps and bounds, and as those gross sales skyrocket, valuation metrics will come down. It’s not uncommon for a snappily-rising firm to bear a significant greater valuation than an established participant in a given substitute. 

One other classic argument from Tesla bulls is that Tesla is rarely always reliable any susceptible automaker: it’s if truth be told a tech firm, so it must be evaluated against other tech companies. CEO Elon Musk clearly is of the same opinion. On Tesla’s Q3 2020 earnings call, Musk expressed his belief that “there’s in rather more than a dozen originate up-united stateseffectively in Tesla,” along side builders of microchips, battery cells, superchargers, and self reliant riding expertise.

Absolutely, as soon as we overview Tesla’s tag-to-gross sales ratio to just a few alternative hot stocks in the tech sector, its valuation looks to be like rather more cheap:

TSLA PS Ratio Chart

TSLA PS Ratio recordsdata by YCharts.

The price-to-gross sales ratio is the simplest usable metric for comparison here because a host of these companies, along side Shopify, are not but profitable. On the opposite hand, Tesla’s P/S ratio even compares favorably to fellow electric carmaker NIO and established graphics processor specialist NVIDIA (NASDAQ:NVDA).

Tesla is the ideal of these companies, with a market cap of about $370 billion, but NVIDIA is rarely always a long way in the relief of, with a market cap of about $308 billion. On the opposite hand, by other valuation metrics, Tesla fares significant worse against NVIDIA:

TSLA PE Ratio Chart

TSLA PE Ratio recordsdata by YCharts.

A greater P/E ratio is nice for Tesla since it has vastly more depreciable property than NVIDIA, but even going by the EV-to-EBITDA ratio, which strips out depreciation, NVIDIA sports activities a superior valuation. NVIDIA, though, has been round plenty longer than Tesla. 

So, the ask looks to be: is Tesla more cherish snappily-rising originate up-ups Zoom video Communications or Shopify, or more cherish established avid gamers NVIDIA or Toyota?

Time will uncover

This is rarely always a easy ask to answer to. Absolutely, Tesla has an advantage over a host of its competitors in the electrical automobile home in that it’s been manufacturing electric automobiles for a in point of fact long time and thus has expertise with the linked expertise, designate challenges, provide chains, and so forth. It also might perhaps bear a important leg up in phrases of workmanship and patents.

On the opposite hand, competition in the home is set to uncover fierce, with unique electric automobile originate up-united statesand established auto companies bringing a flood of battery-electric automobiles to market between 2021 and 2023. Other originate up-united statesare serious about teach aspects of automobile tech, cherish Hyliion‘s electric drivetrains and Velodyne‘s lidar expertise for self reliant riding. 

Tesla, though, has a wild card in the build of its non-car companies, Picture voltaic Roof photovoltaic shingles and Powerwall and Megacell vitality storage expertise. Neither one is for the time being making important contributions to Tesla’s backside line, but every is presumably a important supply of profits down the road, searching on how things shake out.

The verdict

Tesla’s clearly no good deal, and looks to be richly valued. Whether you watched it’s overvalued relies on what form of enhance you search info from to take a examine in Tesla’s automobile gross sales, its technological advances, and gross sales and trend of the firm’s non-automobile merchandise. 

I tried to sport out the probability of a gigantic selection of enhance scenarios and gave up; there are reliable too many variables in this snappily-provocative substitute. On the opposite hand, Tesla’s enhance doable potentially earns it a greater valuation than a legacy automobile firm. That acknowledged, a lot of enhance looks to be priced into the stock, which has had an inclination not to transfer in tandem with the firm’s fundamentals.

Backside line: payment investors might perhaps silent potentially steer sure, and even enhance investors must undergo in thoughts that things might perhaps not crawl per idea.

John Bromels owns shares of BMW, NVIDIA, and Tesla. The Motley Fool owns shares of and recommends NVIDIA, Shopify, Tesla, and Zoom video Communications. The Motley Fool recommends BMW. The Motley Fool has a disclosure policy.


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