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 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.
Tesla is worth a ton compared to the actual size of the company and their sales.
But saying that the stock is overvalued is an opinion. A stock is valued what people pay for it. So if these people are so sure that tesla is overvalued, then why aren’t they putting in massive short positions to make lots of money when the market adapts? Because they aren’t that sure that Tesla is actually overvalued, it’s just an opinion.
Tesla also isn’t that unique anymore, all the big car companies are taking electric seriously now and in all likelihood will do it better and scale more efficiently. I’m sure Tesla will go down more of a specialised battery route but they are totally overvalued given their turnover and profitability
Stock is a share in ownership of a company.
Thus the “real” value of stock could be seen as the real value of a company. What are it’s assets/profit/future earnings potential etc.
Stock price (like most prices) however is determined by the demand for the stock and *not the companies value/performance.* While normally people buy stock based mainly on the companies value there are many reasons that people may chose to buy stock regardless.
Consider the meme stock purchasing driving multiple failing business stock value up to insane heights.
In Tesla’s case people buy into Tesla largely based on the dreams and fantasies that it presents (the advanced electric technological future) rather than the real earnings potential of the company. That love of Tesla/Musk has essentially created artificial demand far beyond the real value of the company.
There is a famous formula by Peter Lynch:
Price/Earnings = Growth
If a company’s stock is worth $100, and the entire company’s profits are $1/share, the company has to be growing at least 100%/year, every year, compounded for the next five years for it to be “valued correctly”.
Otherwise, you use the Benjamin Graham formula, which roughly works out to be:
Price/Earnings = 15 or so, depending on interest rates.
Tesla stock must be supported by Tesla’s ability to make money, otherwise, it’s speculation.
At one point Tesla (in 2020?) was valued higher than all car manufacturers combined. And back then you could also talk to people who genuinely believed that all cars will be Tesla.
I mean we know how large is the population of Earth. We also have UN projections showing that it will likely not grow beyond 10 billion people. Not everyone owns a car, not everywhere people even started to transition to EVs. Yet, Tesla “valuation” often suggests that everyone will drive a Tesla (and all other car giants will go bankrupt). This is ridiculous.
It’s fascinating how perceptions of value can change over time. In 2018, many believed Tesla was overvalued at 50 billion, yet today it’s valued at 800 billion, and with current financials the stock would have been extremely undervalued in 2018.
This example with Tesla shows us how tricky it can be to guess the value of things. Imagine you have a toy that you thought was only worth a little, but then your friends start wanting it a lot. Suddenly, they’re willing to pay a whole lot more for it, and you realize you could have asked for more all along.
Stocks are like those toys. Sometimes, people think a company is worth less than it really is, just because they don’t see all the good things the company is doing. Other times, everyone gets really excited and thinks a company is worth a ton, even if it didn’t seem like that before.
So, even though people thought Tesla was worth too much in 2018, it turned out they were wrong because the company did really well. This teaches us that what people think a company is worth (its stock price) can change a lot, and sometimes public opinion doesn’t get it right. Just like how your toy can become super valuable when everyone wants it, even if they didn’t want it before.
On one hand the value of anything is what people are paying for it now however ….
When deciding whether the stock of a company is priced according to fundamentals ain vestor may look at:
Price to earnings ratio (p/e)
Debt ratios and expenses
Cash flows
Revenue growth
And about a gazillion other “metrics” that you can plug into a formula to guess the expected value of a stock
So, if you use p/e a company that trades at a much higher ratio than similar companies might be over valued
Or if a certain stock has large revenue growth compared to peers but trades at a lower p/e it might be undervalued
Those are simple, one dimensional examples
The reality is that at the moment the market is random. Traders do what they do regardless of your calculations
However, the value investor relies on mean reversion. In the long run, fundamentals rule
I won’t comment on by belief of TSLAs value however by some metrics the current share price is higher than the underlying fundamentals demand
There are common ratios people use for stocks, so overvalued/undervalued just means that, for similar businesses, the stock has one or more of these ratios that are outliers. Stocks like Tesla, which are kind of like comparable auto companies but also significantly different in some ways, often get flagged as “overvalued” because the market sees something different and unique in them.
The most common ratios are:
Price / earnings or P/E or PE: stock price divided by EPS.
Price / earnings / growth or PEG: P/E divided by the expected earnings growth. A low number suggests the stock is undervalued.
Price / sales or P/S or sometimes PSR: stock price divided by revenue.
It just means that “people” think the stock price will be lower in the future than it is today. The reasons behind their thinking, as per the many comments here, can vary.
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