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.
In: 284
It means nothing. The only thing that determines a stock’s value is what someone is willing to pay for it.
The technical basis most people use to claim that a stock is overvalued is something called the price -to-earnings ratio (P/E ratio). That is literally price per share divided by earnings per share. The current share price is available all the time by simply looking up the sticker. Earnings price per share is published quarterly in the company’s financial reports.
A company’s P/E ratio is available on most financial news websites. For example, here is the [Yahoo Finance page for TSLA (Tesla)](https://finance.yahoo.com/quote/TSLA?p=TSLA&.tsrc=fin-srch). It lists a P/E Ratio of 84.09. Let’s compare that to Toyota, Ford, GM, and Honda.
|Automaker|Symbol|P/E Ratio|
|:-|:-|:-|
|Toyota|[TM](https://finance.yahoo.com/quote/TM?p=TM&.tsrc=fin-srch)|12.67|
|Ford|[F](https://finance.yahoo.com/quote/F?p=F&.tsrc=fin-srch)|17.80|
|GM|[GM](https://finance.yahoo.com/quote/GM?p=GM&.tsrc=fin-srch)|5.71|
|Honda|[HMC](https://finance.yahoo.com/quote/HMC?p=HMC&.tsrc=fin-srch)|11.46|
|Tesla|[TSLA](https://finance.yahoo.com/quote/TSLA?p=TSLA&.tsrc=fin-srch)|84.09|
You can click those links and look for “PE Ration (TTM)” on the page.
When people say they think TSLA is worth 1/5 as much, they mean that they think it’s stock price should be lower so that their P/E ratio would be more similar to other automakers.
This is an incredibly simplistic way to look at stock prices though, and usually when someone says this, they’re just expressing their speculative opinion.
Earnings are complicated. Tesla is a new company, and they’re investing massive sums of money into new production facilities and product features. Since earnings are profits after tax, this means Tesla’s earnings appear lower than they actually are. Larger, more established companies like Ford and GM are mostly done making big investments in new factories. They’re also much larger companies. Look at a comparison of their revenues and earnings:
|Automaker|2022 Revenue|
|:-|:-|
|Ford|$158 billion|
|GM|$157 billion|
|Tesla|$82 billion|
Ford and GM have a lot more revenues to work with, so any investments they do make have a smaller proportional impact. Tesla is still growing aggressively, which means they have to divert more of their revenues to additional capacity and product development. This reduces their earnings, and makes their P/E ratio look very different than established incumbents.
The more you learn about stock analysis, the more you learn that any sweeping statement should be taken with a boulder sized grain of salt. Most people don’t really understand the industry they’re commenting on, and are just repeating something they heard an analyst on television say.
Latest Answers