I just saw a post that said Tesla stock is only worth 1/5 as much as it’s valued as. It doesn’t make sense to me.
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It’s arguing that the share price represents a company value way higher than it’s actually worth.
People usually look at the ratio between the price of a share and the earnings of the company divided by the number of shares.
Pretty much all the major car manufacturers typically have P/E ratios of something like 10 to 20. Tesla’s sits at something like 60 and in 2020 got as high as 900.
Having a high price to earnings ratio implies that investors think the firm is likely to grow in earnings in the future, in this case by a lot. It’s very easy to see why people might think investors are wrong about this and the stock is thus “artificially” inflated by hype.
They mean that the selling/buying price doesn’t reflect the “real value” of the stock in their opinion. This is kind of esoteric because of course, the only thing that defines the price (and therefore the value) of a stock is what people are willing to pay to buy it. However, what people want when they buy a stock is not a stock that is expensive, but a stock that will return value in the future – one that is likely to retain and gain in price, not one that is just expensive right now. That means that the (hidden, “true”) value of a stock is actually determined by other factors, such as how well the company is performing or is expected to perform in the future, or things like predictions of a stock’s future value based on past changes in price.
The difference between the price of a stock and its supposed real value is thus an area where people can greatly disagree. Actually, there has to be disagreement for any such difference to exist, because if the price of a stock is a certain amount, well that means that somebody is willing to pay that amount, meaning that that somebody presumably believes that the stock is worth that amount. Others might disagree, maybe based on data, or maybe just on opinion. After all, if the real value of a stock – a value which accurately encompassed all future price changes of the stock – could be determined reliably, there would be no speculative market at all because everyone would know exactly which stocks to buy at exactly which prices. The whole game is to buy a stock that will gain in price and then sell it at the exact moment before the price will be thought to be too high. But obviously nobody would ever buy something they knew was about to drop in price. so speculation can only exist if people have incomplete information about value.
There’s a relevant idea called the “greater fool theory”. Essentially, I sell you a chicken that I claim may someday lay a golden egg. You know that this impossible, but you realize that somebody else might not think so. So you buy the chicken anyway at a highly inflated price based on the assumption that there’s a ‘greater fool’ out there who will buy it off you for more. And then maybe you do some advertising to create the impression in people that some chickens do lay golden eggs. Maybe the guy who you end up selling it to *also* secretly knows that chickens never lay golden eggs, and is just playing the same game, but either way it’s all the same to you. In highly speculative markets this sometimes seems to work – nobody thinks *they’re* the fool, they all think they’re the last smart guy in the chain who is going to profit big off the greater fool. Whether or not they actually are, this can lead to the speculative price far outstripping the actual agreed value of the thing being sold – everyone tacitly agrees what they’re doing makes no practical sense, but they also all think there’s somebody out there who doesn’t realize that.
Look at their competition.
Ford stock (F) is 12.7 times their earnings
GM stock (GM) is 5.16 times their earnings
Toyota stock (TM) is 10.94 times their earnings
Honda stock (HMC) is 10.67 times their earnings
Tesla stock (TSLA) is 73.61 times their earnings
One of these things is not like the others.
Tesla trades more like a speculative tech company than a large car manufacturer, and many investors wonder how long that can last.
For the current price, if Tesla takes all the profit every year and give it back to you, it takes 70 years for you to make your money back. (Not accounting for inflation)
If you assume that Tesla can increase its current profit by 20% every year and invest back into itself with the same rate (and still no inflation), it takes 25 years for you to start making profit, but after the next 5 years (year 30), you will triple your money. (Still assuming that it will give back all the profit to you at year 30, which it never will)
Of course you can assume that Tesla will be able to increase its profits at a much higher rate than that and justify the current price, but many people will find that not feasible and even if it did, Elon Musk just can decide not to give you (as the shareholder) back any profit.
The value of a company is theoretically, it’s breakup value, the value of its profits, and the present value of all future profits. The vast majority of Teslas value is its future profits. Saying it is overvalued means you don’t think it’s future profits will be enough to justify its current price.
You have to realize stock prices are completely arbitrary.
It’s a piece of worthless share which one person has, and someone has to agree to buy it at $xx price.
A company can be thriving, doing well, yet their stock prices can essentially be $1. The inverse is also true.
This just means that you can have a pile of shit, and someone is willing to pay you thousands of dollars for it. Do you care? You shouldn’t, cause although it’s worthless to you, someone values it.
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That being said, stock prices have no bearing. So, what do professionals do? They compare it to their peers. Somehow, people all around the world have in the minds that the automotive industry should cost around $20/share. Ford could be $19, Toyota could be $20, but whatever they are, it’s around $20 (or at least close to it).
All the sudden, this new car company less than 20yrs old, which often is worth less than $20 cause they’re new, is worth $100, which is 5x the amount.
Let that sink in.
Toyota/Honda/Ford/VW,etc. have been around for decades, they’re reliable, trustworthy, have proven record, and continues to be successful, all the sudden this teenager is worth 5x their worth. 5x of $1 is $5, so it’s not much. But when others are worth $200B and this noob is $1T, that’s a whole lot of 0’s..
Kinda bonkers.
But, like I said – the price is arbitrary. The majority of people that play the stock market is willing to pay that much. Some people think Tesla is a pile of shit, but others think there’s gold underneath it waiting to emerge. I guess majority think there’s gold.
It’s because in theory, a share is worth however much in profit you will be getting from that company throughout the lifetime of that company. Right now if you buy a share of tesla, it would take 67 years for tesla to generate enough profit for you to make your money back.
This is very simplified and ignores that profits aren’t directly distributed as dividends or buybacks until later in a company’s life cycle and that teslas revenues continue to grow rapidly and the time value of money (discount rate)
Let’s say you open a lemonade stand. You do $100 of profit a month and you have about $200 of supplies (the stand, the ingredients, the pitchers, etc.). You’re looking for money, so you offer to let somebody co-own with you (splitting the ownership of the lemonade stand and its profits) if they “buy” that stake. That person now has to decide how much they’d be willing to pay to “buy” that co-owner stake. That is, they have to determine the *value* of your lemonade stand. There are a lot of ways to do this (which is why people can disagree about value).
– One person may say that they want to the deal to pay for itself within 5 months. So, the “value” is what their stake (50%) would make in 5 months ($500). They wouldn’t want to pay more than $250 for that 50% stake, so that “values” your lemonade stand at $500.
– Another person might see fall coming and think your lemonade sales are going to stop so they don’t think the “value” is really in the amount of money you’re making. Instead, they notice that you own this $200 of supplies and they figure they can sell that off to somebody else. So, for them, the value of your lemonade stand is their stake (50%) of the assets you have ($200) which is $100 and therefore the value of your company is $200.
Now imagine that there are two buyers. One has the first way of calculating value from above and the other has the second method. That means one sees the value as $500 and will buy half the company for $250, while the other sees the value as $200 and will buy half the company for $200. The latter person would say that the former is overvaluing the lemonade stand. It’s just a fancy way of saying that you don’t agree with the way they are deciding how valuable it is because you think it leads to too high of a number.
(Where it gets even trickier is that there is speculation about how things will change in the future. Lets say that you say that you are projecting each month you’ll be able to make 10% more profit than the last because word of mouth is leading to more sales and that next year you’ll have a lemon tree and so your costs will go way down compared to buying them at the store. Additionally, since summer is coming you think there will be a lot of hot days when people buy more and you’re also thinking of selling snacks too. Meanwhile, your neighbor sees your success and is going to start an iced tea stand next door that may take some of your customers. In this case, there is a lot of room to disagree on what the value of your company is because it’s a lot of speculation as to how these things will change in the future.)
In the case of Tesla, people saying it’s overvalued just mean that the amount people are willing for a piece of the company, doesn’t reflect any reasonable way of calculating what the company would be worth.
Compared to other auto industry companies the Tesla stock is extremely high, but what people forget is that Tesla is not just an auto industry company. It’s also a data and energy company. It would be comparing apples and oranges.
However most people see that the share price for Tesla is too high for the level of profit they make.
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