Shares of Tesla Inc on stock exchange
The shares of Tesla Inc are trading on the stock exchange in the USA at $877.51 as of 29th April 2022. The shares of the company are highly overpriced at a price-to-earnings ratio of 156.70 times as compared to its peers, the industry average for which is 12.47 times. The investment advice on the shares of Tesla is to sell the shares as the shares are highly overpriced from their intrinsic value. As per the analysis, the shares of the company have an intrinsic value of $376.87 per share as per discounted cash flow model. The markets in their current situation are highly overvalued and are expected to return to normal, driving the price of the stocks lower. The company has shown exponential growth in 2021 from the low base effect of 2020, which has driven the price higher. The price of the shares is bound to come to its intrinsic value once there is a correction.
Tesla Inc is a company in the automotive sector that is focused on developing, manufacturing and selling electric vehicles. The company is based in the USA and has almost 99,290 employees. The company is directly engaged with the customers by selling the cars directly to its customers without involving any third-party sellers. The company currently operates in most of the developed nations but has a low presence in Asia. The company is divided into two operating segments which are automotive and energy generation and storage. Its first line of operation includes design, development, manufacture, sell and after sell services of electric cars along with insurance for the cars. The other operation line consists of developing and selling solar energy devices. The current fleet of cars in its production line are the Model 3, Model Y, Model S and the Model X (Sec.gov. 2021). The company believes in innovation and is driven by the innovative technologies that boost its revenue.
The competition of Tesla in the automotive sector is intense from the large car manufacturers like BMW, Ford, General Motors and Volkswagen. The company is able to enjoy a different market for itself due to the electric car and the technology used. The other traditional carmakers are way behind Tesla in electric car technology but catching up really quickly. The main growth driver for the company is the innovation in electric car technology and autopilot technology in its cars which is preferred by its customers. The company has been able to grow at a very high rate due to the shift towards the electric and eco-friendly nature of electric cars. Tesla’s car is at the top of the market competition in the electric vehicle category. The launch of new models seems to drive the sale of cars in Tesla higher. The company has been under question for the effect of its batteries on the environment. The reliability of traditional cars has been a challenge for the company. The market share of the company in the overall automotive market is small compared to the other companies.
Tesla Inc: Automotive Company Overview
On analyzing the financials of the company starting from 2017 to 2021 using the financial ratios. The company has improved its three profitability ratios over time and has become profitable from loss-making. The current profit margins are healthy for a company in its growth phase and are bound to arise in the future (Husain & Sunardi, 2020).
Figure 1: Profitability Ratios
The liquidity of the company has improved in recent years, starting in 2020, when the current and quick ratio both have improved to be enough for repaying the debt obligations in the short term.
Figure 2: Liquidity Ratios
Tesla Inc has improved its debt to equity and debt ratio by lowering its dependency on debt capital. The current debt-to-equity ratio is 1, indicating equal distribution between the equity and debt capital of the company. This has led to a positive correction in the price of its shares. The debt coverage ratio has turned positive in 2020, indicating it is able to meet the interest expense from its operating profits, which have grown significantly in 2021 to 20.71 times signaling high profits for the company.
Figure 3: Solvency Ratios
The company has kept the receivable days in a range going up to 22 days which indicates high efficiency. The payable days are a measure of a company’s efficiency in paying back its trade payables. It has remained unchanged since 2017. The inventory days indicate a company’s efficiency in using its inventory to make sales. The efficiency has decreased for Tesla as it has increased from 10 days to 15 days in 2021.
Figure 4: Efficiency Ratios
Under the price-earnings multiple methods, the value of a stock is computed by multiplying the current earnings per share of the company with the average industry price-earnings multiple. In the case of Tesla, the industry comprises companies like Ford, BMW, Volkswagen, General Motors, Ferrari and Harley-Davidson. The current price-earnings ratio of the companies is averaged to get the industry average price earnings ratio which is 12.47 times. Thus, the value of each share of the company comes to $69.84, which is much below the current price.
The advantages of this method are that it is simple to use, and peer companies in the industry can be used to calculate the relative value of the share being valued. It is based on the current earnings of the company and does not consider the growth in earnings which is a limitation of this model. Another limitation is the model ignores the debt in the company, which can affect the valuation of its equity (Chutka & Kramarova, 2020). In the case of Tesla, the model does not provide proper valuation due to the lack of similar growth companies in the industry, which keep the valuation low. This model is not useful in valuing loss-making companies.
Figure 5: Price-earnings multiple valuation of Tesla Inc
The discounted cash flow model is an extensive model that uses historical data to forecast the future cash flows of the company. Under this method, the future free cash flows are discounted to bring to present value to get the current value of the company (Bee, 2018). Under this method, the terminal value of the company is estimated using the enterprise value to earnings before interest, tax, depreciation and amortization (EV/EBITDA) multiple. The enterprise value obtained is added with the non-operating working capital (cash), and the debt and non-controlling interest are reduced to get the value of equity. The value thus obtained by dividing by the number of outstanding shares is the value per share of the company.
Competition of Tesla in the automotive sector
For Tesla, the value per share obtained is $367.87, assuming the revenue will grow slowly in the next five years, eventually coming to a 15% growth rate. The value thus obtained is below the current market price of its shares, indicating a downside of almost 57% from the current levels.
The model is apt for valuing companies like Tesla, which are in their growth stage. The model is based on the cash flows, which makes it possible to value loss-making companies. The limitation of this model is that it requires projections that can vary according to assumptions taken by the valuer. The calculation of the weighted average cost of capital and forecasting the future of the company can be difficult at times.
The market for electric cars is still a niche market which for Tesla has to bear the uncertainties regarding the future of the electric vehicle market. In case the mass does not shift to electric vehicles, the growth of the company will be limited. As a leader in the segment, Tesla has to face intense competition from other carmakers that are launching their electric and hybrid models. The options available to consumers reduce the sales of Tesla as the price has to be lowered to compete with the market. The company invests heavily in research and development, for which its cost is high and reducing prices may not be preferred by the company. The greatest risk that the company faces is the eco-friendliness of its lithium-ion batteries, which causes huge damage to the environment that can impact its sales in the future (Bansal, 2021). Lastly, the CEO of the company Elon Musk holds 21% of the equity in the company and uses it as collateral which can cause a large-scale financial problem in the company in case of default (Morningstar.com, 2022).
The company still has room to grow and expand to other markets around the world. The future growth of the company will be determined by the management to either expand to other markets or penetrate the existing markets. In both cases, the company is bound to grow and provide returns for the investors. The company provides a good investment opportunity if the price corrects near the target price.
Chutka, J., & Kramarova, K. (2020). Usage of P/E earning models as a tool for valuation of shares in condition of global market. SHS Web Of Conferences, 74, 01007. doi: 10.1051/shsconf/20207401007
Bee, T. (2018). Discounted Cash Flow Method for Valuing International Chemical Distributors. The Journal Of Private Equity, 22(1), 52-69. doi: 10.3905/jpe.2018.22.1.052
Husain, T., & Sunardi, N. (2020). Firm’s Value Prediction Based on Profitability Ratios and Dividend Policy. Finance & Economics Review, 2(2), 13-26.
Morningstar.com. (2022). Tesla Inc (TSLA) Stock Analysis – XNAS | Morningstar. Retrieved 30 April 2022, from https://www.morningstar.com/stocks/xnas/tsla/analysis
Bansal, T. (2021). How Green Is Tesla, Really?. Retrieved 30 April 2022, from https://www.forbes.com/sites/timabansal/2021/05/13/how-green-is-tesla-really/?sh=71e105391576
Sec.gov. (2021). Tesla, Inc. Form 10-K. Retrieved 30 April 2022, from https://www.sec.gov/ix?doc=/Archives/edgar/data/1318605/000095017022000796/tsla-20211231.htm#item_1_business
Sec.gov. (2020). Tesla, Inc. Form 10-K. Retrieved 30 April 2022, from https://www.sec.gov/Archives/edgar/data/1318605/000156459021004599/tsla-10k_20201231.htm
Sec.gov. (2019). Tesla, Inc. Form 10-K. Retrieved 30 April 2022, from https://www.sec.gov/Archives/edgar/data/1318605/000156459020004475/tsla-10k_20191231.htm
Sec.gov. (2018). Tesla, Inc. Form 10-K. Retrieved 30 April 2022, from https://www.sec.gov/Archives/edgar/data/1318605/000156459019003165/tsla-10k_20181231.htm
Sec.gov. (2017). Tesla, Inc. Form 10-K. Retrieved 30 April 2022, from https://www.sec.gov/Archives/edgar/data/1318605/000156459018002956/tsla-10k_20171231.htm
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
