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Explore Tesla Stock Valuation With Only 5 Ratios

Tesla battery & pack production line. Source: Tesla Q1 2020 investor update letter.

It’s difficult to value the worth of a company. This situation is more apparent when it comes to valuing Tesla. As of this article was published, Tesla’s stock has surged past USD$1,000 per piece, bringing the company total market cap to nearly $200 billion.

At this value, Tesla has notably overtaken Toyota as the world’s most valuable automobile company. Is Tesla worth this much? Let’s take a look.

In this article, we will explore Tesla’s stock valuation from the perspective of 5 ratios. And these 5 ratios are Tesla’s market capitalization to revenue or sales, market cap to book value, market cap to gross profit, market cap to free cash flow and market cap to EBITDA ratio.

We will look at these ratios over several years to see how the company has been valued from a historical standpoint. So, just sit tight and read on!

How The Ratios Are Measured

I have created several charts below that track Tesla’s valuation ratios with respect to the company’s market capitalization over several fundamental variables that were extracted from the financial statements.

For Tesla’s market capitalization, the stock prices used were on a weekly basis whereas the number of shares outstanding was based on the quarterly figures.

Moreover, financial figures such as revenues, gross profit, stockholders’ equity, free cash flow as well as the EBITDA were also based on the quarterly data extracted from the quarterly and annual filings.

The EBITDA was measured according to Tesla’s adjusted EBITDA instead of using the standard measurement of EBITDA.

How The Data Are Plotted In The Charts

As mentioned, Tesla’s share prices used to calculate the company market cap were according to the weekly figures. Therefore, the charts below were plotted on a weekly basis.

Financial data such as revenues, book value, cash flow, etc in the chart were based on the quarterly results. However, the date in which the data were plotted were based on the date the financial results were released during a conference call.

For example, Tesla released the 1Q 2020 financial results on April 29th, 2020, therefore, the 1Q 2020 data such as revenue, book value, cash flow, etc were plotted in the chart based on the release date which was April 29th, 2020.

Moreover, financial data such as revenues, gross profit, free cash flow and EBITDA were measured on a trailing twelve months basis (TTM) except for shareholders’ equity in which the most recent quarter (MRQ) data was used.

How Accurate Are The Ratios

Tesla valuation results from Yahoo Finance

Tesla valuation results from Yahoo Finance

I have compared the results of the ratios with that extracted from Yahoo Finance and found that they are closely matched.

For example, Tesla’s market cap was around $48 billion as of March 31, 2019, and the value hit $75 billion by the end of December based on Yahoo Finance results (snapshot above).

These results are pretty much in sync with the results in the charts in the following discussion.

If you scroll to the Tesla’s market cap section, you can see from the chart that Tesla’s market cap was in between the $40 and $60 billion range during March-April 2019.

Likewise, Tesla’s market cap was between $60 and $80 billion by the end of December 2019 as seen from the same chart.

In terms of ratio such as the market cap to revenue ratio, Yahoo Finance results indicate that the current result was 6.8 in June 2020. Similarly, the market cap to revenue ratio chart below shows that the same ratio was around 7.0.

How about the market cap to book value ratio? Yahoo Finance results show that the figure was 19.4 as of June 2020. A similar ratio was found in the market cap to book value ratio chart in June 2020.

In short, both market cap to sales and book value ratios plotted in the following charts are pretty much matching the Yahoo Finance results.

As such, I am pretty comfortable with the accuracy of all the plots that we are going to discuss below.

Chart of Tesla’s Market Capitalization

Tesla market capitalization

Tesla market capitalization

Let’s first look at Tesla’s market cap before diving into the ratios. The chart above shows Tesla’s total market capitalization from 2016 to 2020.

Over the past 5 years, Tesla’s total market cap has increased almost 10X, growing from only $20 billion in market cap back in 2016 to nearly $200 billion in 2020.

The growth in the company market cap has been nothing short of extraordinary. If you have invested $1,000 in Tesla’s stock in 2016 (stock price was around $150 in Feb 2016), your return on investment would have been slightly over 700% and your total investment would come close to $7,000 by 2020 within a period of less than 5 years.

Also, have you noticed that the market cap has taken a severe hit in the early of 2020, dropping from a value of $160 billion to as low as $80 billion?

The decline in market cap has been mainly driven by the COVID-19 scare which has seriously crippled the automotive industry. However, Tesla’s stock emerged from the drop unscattered and moved even higher post-COVID-19 pandemic.

Chart of Tesla’s Market Cap to Revenue Ratio

Tesla market cap to revenue ratio

Tesla market cap to revenue ratio

The chart above shows Tesla’s market capitalization to sales ratio between 2016 and 2020. As discussed, trailing twelve months (TTM) of revenues were used to measure the ratio.

As shown in the chart, Tesla’s market cap to sales ratio was way higher back in 2016, averaging around 7.0.

However, the ratio declined steadily over the years and reached as low as 1.5 in 2019, indicating that Tesla’s valuation with respect to revenue has also been in the decline in tandem with the ratio.

The low price to sales ratio in 2019 was also partly driven by Tesla’s surging revenue which occurred between 2018 and 2019.

Before you know it, Tesla’s share price exploded post-Q2 2019, bringing the company’s valuation along with it higher in the second half of 2019 and all the way to 2020.

The decreasing market cap to revenue ratio which occurred between 2016 and mid-2019 also implies that the company’s total revenue has also been increasing during the same period as seen from the contrasting direction between the market cap plot and the market cap to revenue ratio.

Notice that Tesla’s market cap has been roughly constant, averaging around $40-$50 billion between 2016 and mid-2019.

If anyone had noticed the trend as seen from the low valuation of Tesla’s stock and bought the stocks in mid of 2019, you would have reaped a handsome reward by now. In June 2019, Tesla’s stock was only priced at $230 per piece, giving you a return on investment of roughly 500% by June 2020.

As of June 2020, Tesla’s valuation with respect to sales was at an all-time high at 7.0.

Chart of Tesla’s Market Cap to Book Value Ratio

Tesla market cap to book value ratio

Tesla market cap to book value ratio

The chart above shows Tesla’s market cap to book value or shareholders’ equity between 2016 and 2020.

As seen from the chart, Tesla’s market cap to equity ratio has been flat at roughly 10.0 between 2016 and 2019. The ratio implies that Tesla’s stock price was trading at more than 10 times the company’s book value or net worth.

Similarly, Tesla’s stock price took off in Q4 2019, causing the market cap to book value ratio to reach a new high at 20.0 as of June 2020.

At 20 times of book value or net worth, Tesla was trading at a sky-high valuation compared to its peers such as Toyota, Ford and GM to name a few.

From a comparison perspective, Toyota’s market cap to equity was only 0.94 as of June 2020. GM and Ford market cap to equity ratio was even lower than that of Toyota according to Yahoo Finance.

Chart of Tesla’s Market Cap to Gross Profit Ratio

Tesla market cap to gross profit ratio

Tesla market cap to gross profit ratio

The gross profit is a measurement of Tesla’s profitability when only the cost of goods sold are taken into account while excluding other costs such as R&D and SG&A expenses.

Why gross profit you may ask? The reason is that Tesla has only been profitable at the gross profit level. Other than gross profit, Tesla has incurred losses amounting to billions of dollars in terms of operating loss and net loss.

As seen from the chart above, Tesla’s market cap to gross profit has been roughly flat between 2016 and 2018, averaging around 25.0.

However, the ratio started to drop at the end of 2018 and reached a new low at about 10.0 by Q3 2019. The declining ratio also implies that Tesla’s gross income has been increasing at quite a substantial rate during 2019.

Before you know it, the valuation with respect to gross income surged in line with the growing market capitalization since Q4 2019.

As of June 2020, Tesla’s market cap to gross income ratio reached a new high at more than 35.0.

Chart of Tesla’s Market Cap to Free Cash Flow Ratio

Tesla market cap to free cash flow ratio

Tesla market cap to free cash flow ratio

Free cash flow is another important variable that can be used to relate to Tesla’s valuation. As we all know, cash is king when it comes to the survival of the company. The company can be operated without profit but not without cash. All it takes is only a quarter of operation wit zero cash balance to plunge the company into bankruptcy.

As such, I have created the chart above that tracks Tesla’s market cap to free cash flow ratio from 2016 to 2020. Take note that the free cash flow was measured on a trailing twelve months (TTM) basis in the above chart.

Based on the chart above, the majority of the ratio is at 0. The reason is that Tesla failed to generate any positive free cash flow in these particular periods.

Nevertheless, Tesla managed to generate a tiny bit of free cash flow starting in June 2019 as seen from the surging market cap to free cash flow ratio which reached more than 300.0.

As Tesla improved its free cash flow generation by the end of 2019, the ratio declined substantially to less than 50.0.

However, the ratio surged again and reached more than 150.0 by June 2020 when Tesla’s valuation soared while free cash flow generation continued to improve.

The increasing market cap to free cash flow ratio in 2020 shows that the company valuation increased at a much faster rate than the rate of the increment for free cash flow.

As of June 2020, Tesla’s market cap to free cash flow ratio surged beyond 150.0 which was a new high since 2020.

Chart of Tesla’s Market Cap to EBITDA

Tesla market cap to EBITDA ratio

Tesla market cap to EBITDA ratio

Another important variable that can relate to Tesla’s valuation is EBITDA. EBITDA is a metric that measures Tesla’s liquidity and is similar to operating cash flow but before taking into account the investment in working capital and fixed assets as explained in this article: Tesla’s EBITDA.

As seen from the chart above, Tesla’s market cap to EBITDA ratio had been above 50 between 2016 and 2018. The reason is that Tesla’s EBITDA had only been limited during these periods.

Starting in 2019, Tesla’s EBITDA significantly improved as reflected by the drop in the market cap to EBITDA ratio and reached as low as 15 in the mid of 2019 while the company’s valuation stayed roughly flat in the same periods.

However, the ratio took off by the end of 2019 and reached a new high at a ratio of about 50 by mid of 2020.

Based on the chart, the best time to buy Tesla’s stock would be during the mid of 2019 when the valuation with respect to EBITDA was at an all-time low. During these periods, nobody noticed the improving EBITDA which started in the early of 2019 and had persisted to 2020.

Before long, the company’s valuation started to creep up silently and suddenly exploded in 2020, causing the company’s market cap to reach an all-time high as of June 2020.

Conclusion

In conclusion, Tesla’s market cap has surged more than 500% within a period of less than 1 year, growing from a market cap of only $40 billion in Oct 2019 to nearly $200 billion by June 2020. The growth in valuation has probably gone too fast and too much in such a short period of time.

As of June 2020, Tesla’s valuation with respect to several fundamental variables such as revenues, gross profit, equity, free cash flow as well as EBITDA was at an all-time high.

In the meantime, the valuation of Tesla’s peers such as Toyota, GM and Ford were below book values as of June 2020. Similarly, their valuation with respect to sales was also at an all-time low during the same period of time.

From the analysis of all the charts, the best buy point of Tesla’s stock was in June 2019 when the company’s valuation with respect to all the fundamental variables was at an all-time low.

During June 2019, Tesla’s stock price was only at $230 per piece, giving your return on investment as much as 500% by June 2020 when Tesla’s stock price reached beyond $1000.

Notes to Readers

This article will be updated from time to time to keep track of the changes in Tesla’s market capitalization as well as valuation with respect to all the discussed fundamental variables.

Therefore, please sign up for our newsletter to stay up to date of Tesla’s stock valuation.

References and Credits

1. Financial figures in all charts and images were obtained and referenced from the following websites:

a. Tesla Financial Results Released Date
b. Tesla Annual and Quarterly Filings
c. Tesla Key Statistic From Yahoo Finance

2. Featured images in this article are used under creative commons license and sourced from the following websites: Paulius Malinovskis.

Disclosure

Readers, investors or visitors are free to use, copy, quote, distribute, modify, edit, share and link any materials in this webpage such as the charts, snapshots, texts, paragraphs and so on. All you need to do is provide credits such as a link or mention the name of this website.

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