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Explore Tesla Stock Valuation With 7 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.

When this article was published, Tesla’s stock has surged past USD$600 per piece post-5-to-1 split, bringing the company’s total market cap to more than $600 billion.

At this valuation, Tesla has notably overtaken Toyota, GM and Ford’s market cap combined and become 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 several ratios.

These ratios are Tesla’s price to revenue or sales, price to book value, price to gross profit, price to free cash flow, price to EBITDA, price to earnings before interest and taxes (EBIT) as well as the price to earnings ratio.

We will look at these ratios over several periods to see how the company has been valued from a historical standpoint.

Let’s move on!

Where The Data Come From

I have created several charts below that track Tesla’s valuation ratios with respect to the company’s market capitalization.

For example, Tesla’s market capitalization is measured using the adjusted weekly closing prices extracted from Yahoo Finance whereas the number of shares outstanding was based on the quarterly figures extracted from its annual and quarterly filings.

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

The EBITDA was measured according to Tesla’s adjusted EBITDA instead of using the standard EBITDA obtained from most financial institutions.

How The Data Are Plotted

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 on which the data were plotted was based on the official date the financial results were released during a conference call.

For example, Tesla released the 1Q 2020 financial results on April 29th, 2020.

As a result, fundamental data including revenue, book value, cash flow, etc were plotted in the chart based on the earnings release date which was on April 29th, 2020.

Moreover, trailing twelve months or TTM data was used instead of quarterly based results 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 those 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 following charts.

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 price to revenue ratio, Yahoo Finance results indicate that the ratio was 6.8 in June 2020.

Similarly, the price to revenue ratio chart below shows that the same ratio was around 7.0.

The same goes for 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 this post 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 30X, growing from only $20 billion in market cap back in 2016 to more than $600 billion as of Dec 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 (adjusted stock price was only $30 in Feb 2016), your return on investment would have been slightly over 2000%.

Your total investment would come close to $20,000 by Dec 2020 within a period of fewer than 5 years.

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

The decline in market cap has been mainly caused by the COVID-19 scare which has seriously crippled the automotive industry.

However, Tesla’s stock price emerged from the drop unscattered in subsequent periods and moved even higher post-COVID-19 pandemic.

Chart of Tesla’s Price to Sales Ratio

Tesla price to sales ratio

Tesla price to sales/revenue ratio

Another Tesla’s valuation ratio that is worth analyzing would be the price to sales ratio which is shown in the chart above over a period from 2016 to 2020.

As discussed, trailing twelve months (TTM) revenues were used to calculate this 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 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.

During the same period, Tesla’s share price did not take off as was the case for its revenue.

The combination of surging revenue and a depressed stock price has driven the price over revenue ratio to an all-time low throughout 2019.

Before you know it, Tesla’s share price exploded post-Q4 2019, bringing the company’s price over sales valuation higher in the second half of 2019 and all the way to Dec 2020.

As of Dec 2020, Tesla’s price to sales ratio reached an all-time high of nearly 25, bringing the company’s valuation with respect to revenue to a record high since 2016.

If anyone had noticed the low price to sales ratio in mid of 2019 and bought the stock back then, he or she would have reaped a handsome reward by now.

For your information, Tesla’s adjusted stock price was only about $50 in June 2019, giving you a return on investment of more than 1000% by Dec 2020 in a little over a year.

Chart of Tesla’s Price to Book Value Ratio

Tesla price to book value ratio

Tesla price to book value ratio

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

Prior to 2020, Tesla’s price to book ratio has been flat at roughly 10.0 between 2016 and 2019.

At this ratio, Tesla’s stock price was trading at about 10 times the company’s book value or net worth.

Starting in 2020, Tesla’s stock price took off and reached an all-time high by Dec 2020, causing the company’s market cap to book value ratio to reach more than 40.0.

At 40 times book value or net worth, Tesla was valued 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 price to equity was only slightly above 1.00 as of Dec 2020.

GM and Ford’s price to equity ratio was about the same as that of Toyota according to Yahoo Finance during the same period.

In short, Tesla’s valuation with respect to shareholder’s equity was so much higher than its peers.

Chart of Tesla’s Price to Gross Profit Ratio

Tesla price to gross profit ratio

Tesla price 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 been mostly profitable at the gross profit level.

Other than gross profitability, Tesla has incurred losses amounting to billions of dollars in terms of operating 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 decline at the end of 2018 and reached a new low at about 10.0 by the end of 2019.

The declining ratio implies that Tesla’s gross income has been increasing at quite a substantial rate throughout 2019 while having a depressed stock price during the same period.

Before long, investors realized that Tesla’s valuation has been too low and the stock was a buy due to the improving fundamentals and outlook.

As a result, Tesla’s valuation with respect to gross profit surged in line with other valuation ratios beginning in 2020.

As of Dec 2020, Tesla’s price to gross profit ratio broke the 100 thresholds and reached 110 due mainly to the surging stock price.

Chart of Tesla’s Price to EBIT Ratio

Tesla price to EBIT ratio

Tesla price to EBIT ratio

EBIT stands for earnings before interest and taxes. In other words, EBIT also represents operating income or profit.

Tesla’s EBIT covers almost all costs of doing business including costs of revenues, R&D and SGA expenses.

However, interest expenses and taxes are not part of the EBIT.

Nevertheless, Tesla’s price to EBIT or operating income ratio in the chart above reached beyond 300 starting in 2019 due mainly to the tiny operating profit that the company generated.

As of Dec 2020, Tesla’s price to EBIT ratio reached more than 350, representing a new high for the company.

The area in the chart where the ratio is zero indicates that Tesla is having a negative EBIT.

Chart of Tesla’s Price to EBITDA Ratio

Tesla price to EBITDA ratio

Tesla price to EBITDA ratio

Another important variable that relates closely to Tesla’s valuation is EBITDA.

EBITDA stands for earnings before interest, taxes, depreciation and amortization.

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.

For your information, the EBITDA used in the chart above is derived from Tesla’s adjusted EBITDA extracted from the company’s quarterly and annual filings.

According to the chart above, Tesla’s price to EBITDA ratio had surged to extreme levels, above 200, back in 2018.

The reason is that Tesla had only been able to generate a small amount of EBITDA or cash flow in those days, driving the ratio to an extreme high.

Nevertheless, Tesla’s EBITDA slowly improved over the years, starting in 2019 in particular.

As a result, Tesla’s price to EBITDA ratio declined significantly to as low as 15 in mid of 2019 while having a flat stock price in the same period.

When investors realized that Tesla’s valuation was too low, the price to EBITDA ratio took off by the end of 2019 and continued to rise throughout 2020 and reached nearly 140 by the end 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 early 2019 and the improvement 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 of more than $600 billion as of Dec 2020.

Chart of Tesla’s Price to Free Cash Flow Ratio

Tesla price to free cash flow ratio

Tesla price 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 a company.

A company can operate without a profit but not without cash.

All it takes is only a quarter of operation with zero cash balance to plunge the company into bankruptcy.

As such, I have created the chart above to track Tesla’s market cap to free cash flow ratio from 2016 to 2020.

Take note that TTM free cash flow is used in the above chart.

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

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

As Tesla improved its free cash flow generation starting in 2019, the ratio slowly declined and reached less than 50.0 by the end of 2019.

However, the ratio surged again and topped out at nearly 450.0 by 3Q 2020 when Tesla’s valuation soared while free cash flow generation continued to improve.

Tesla’s price to free cash flow ratio plunged to 200 when free cash flow surged again after Tesla released its 3Q results in 2020 Q4.

Again, Tesla’s stock price slowly caught up with free cash flow, driving the ratio to 350 as of Dec 2020.

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 increment for free cash flow.

In short, Tesla’s price to free cash flow has been slowly creeping up again by the end of 2020, indicating that Tesla’s valuation with respect to free cash flow is ticking higher.

Chart of Tesla’s Price to Earnings (PE) Ratio

Tesla price to earnings ratio

Tesla price to earnings ratio

One last valuation ratio that is as important as the free cash flow ratio would be the price to earnings ratio.

The earnings per share or EPS is one of the most important metrics that relate closely to the valuations of most companies, including Tesla.

The EPS dictates the price of Tesla’s stock.

However, according to the chart above, Tesla’s EPS has been mostly negative in most quarterly results, bringing the price to earnings ratio to nill as shown in the chart.

Tesla has only managed to generate positive EPS starting in 2Q 2020 from a TTM perspective.

To make matter worse, Tesla’s earnings per share has been very little, hovering at $0.50 as of 3Q 2020 from a TTM standpoint.

As a result, Tesla’s price to earnings ratio has been on an extreme level as shown in the chart.

For your information, Tesla’s price to earnings ratio debuted at 800 in 3Q 2020 and reach nearly 1,400 as of Dec 2020.

Prior to 3Q 2020, Tesla’s price to earnings ratio has been mostly zero, illustrating the losses that the company has incurred in the past.

In short, Tesla’s price to earnings ratio has been at an extreme level, indicating the extraordinary valuation the company is currently enjoying.

Conclusion

In conclusion, Tesla’s market cap has surged more than 3000% within a period of 5 years, growing from a market cap of only $20 billion in 2016 to more than $600 billion by Dec 2020.

Tesla’s growth in valuation has probably gone too fast and too much in such a short period of time, especially in 2020 where the stock has surged more than 1000% alone.

As of December 2020, Tesla’s valuation with respect to several fundamental variables such as revenues, gross profit, book value, 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 inline bwith ook values as of Dec 2020. Similarly, their valuation with respect to other metrics including sales was also at an all-time low as of Dec 2020.

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 still relatively low.

In June 2019, Tesla’s stock price was around $50 per piece (based on the adjusted value), giving a return on investment of as much as 1,200% by Dec 2020 when Tesla’s stock price traded beyond $600.

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, analysts, bloggers, visitors, researchers, writers, or academicians are highly encouraged to use, copy, quote, distribute, duplicate, modify, edit, upload, download, share and link any materials on this webpage such as the charts, snapshots, texts, paragraphs, etc. You can credit back to this page by a link or a mention of the website. Thanks for sharing!

{ 1 comment… add one }
  • Cristobal Botanch October 20, 2020, 10:08 am

    Thank you for sharing

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