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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Imagine a company makes $10 a year and has 10 shares that cost $1 each.
In this case, it would take you one year to make up your investment.
That’s your P/E ratio. Profit is $10, company is worth $10, so the ratio is 1.
What’s a fair price based on earnings? Well the S&P500 average (500 largest USA companies) is around 24. So if you didn’t reinvest, it would take about 24 years to make your money back assuming the price didn’t change.
Tesla has a PE of 74. So it’s really expensive compared to its peers. This might make sense if Tesla is expected to grow its profits, but that’s REALLY unlikely. The only way they’ve been profitable so far is on the back of significant subsidies and they are facing huge headwinds. So banking on new higher profits is a big gamble that’s unlikely to pay off.
That’s what they mean when they say it’s expensive. The cost relative to what their profit is is really high compared to similar companies and its a risky bet to assume they will make up the difference.
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