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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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.
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