Business as Usual: The Fairness of Tesla Inc. Valuation

Richard Falvo, Maroon-News Staff

Earlier this month, auto manufacturer Tesla, Inc. (NASDAQ: TSLA) eclipsed a market capitalization of $100 billion, making it the second-largest auto company in the world. After passing Volkswagen for second place, Tesla now trails only Toyota Motor Corporation ($232 billion) in the race for World’s Most Valued Car Company. However, with all the positive sentiments surrounding Tesla on the financial marketplace, now seems like a necessary time to analyze the company’s value from both a fundamental and technical approach. After all, TSLA has appreciated over 120% since October 2019, evoking more questions about whether the company is priced fairly. 

Based on the title of this article, I am sure you have already deduced my answer to the questions posed.

First, from a fundamental valuation perspective, Tesla is currently highly priced. According to data from Yardeni Research, the current average Price/Earnings (P/E) ratio for automobile manufacturing firms within the S&P 500 is 6.2x. Typically, P/E Ratios below 15x indicate that a stock is potentially undervalued. So, from this lens, the automotive manufacturing industry itself appears to be priced cheaply. 

With that being said, the current P/E Ratio for TSLA is -1,141.09x. It is worth noting that a negative P/E ratio indicates that a company is not profitable. In the case of Tesla, the company’s Net Income (Sales – Revenue) is -$835 million.

Though Tesla registered annual sales figures of $21.5 billion during its last fiscal year, the company’s operating margins, which are used to measure how much profit a particular firm makes on each dollar’s worth of sales, are well below the industry average. 

As a whole, the “Auto & Truck Manufacturers” industry has an average operating margin of 4.1 percent. This already low figure highlights how difficult it is to produce an extraordinarily profitable business when manufacturing vehicles. 

However, Tesla’s operating margin of 0.62 percent makes the industry average appear impressive. To put that into perspective, for every $100 worth of sales Tesla records, less than $1 is actually booked as profit. 

Such a weak financial figure makes a market capitalization of over $100 billion seem outrageous for Tesla.

From a technical point of view, Tesla appears to be overbought, indicating unjustifiable buying of shares in a short span of time. 

The Relative Strength Index (RSI) is a measure of momentum which measures the speed and change of price movement within a specific security. The RSI is measured on a scale of 0-100, with 0 being extremely oversold and 100 being extremely overbought. Typically, an RSI value below 30 indicates that a stock is heavily oversold, while a value above 70 indicates a stock is heavily overbought. 

Currently, the RSI of TSLA is 77, meaning the stock itself has been unjustifiably overbought over the past couple of weeks. In addition, Tesla’s average stock price over the last 50 days is $410. This represents a price 27.38 percent below the current share price of $550.20. According to the concept of mean reversion, or “what goes up must come down,” over time, TSLA will revert back to its average price, meaning a large pullback in price could very well be in store.

Though I believe in Elon Musks’ vision of a battery-powered future for automobiles is admirable and ambitious, Tesla as a company is extraordinarily overvalued by essentially every conceivable metric