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$1000 per piece post-5-to-1 split, bringing the company’s total market cap to more than $1 trillion.
At this valuation, Tesla has notably overtaken Toyota, Volkswagen, GM and Ford as well as the rest of the automobile companies’ 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 start with the following topics!
Tesla’s 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 for the period from 2016 to 2022.
Over the past 6 years, Tesla’s total market cap has increased almost 30X, growing from only $20 billion in market cap back in 2016 to nearly $1 trillion as of March 2022.
The growth in the company market cap has been nothing short of extraordinary.
Your total investment would come close to $20,000 by March 2022 within a period of 6 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.
Tesla’s Price To Sales Ratio
In terms of price to sales, Tesla’s stock valuation has gone through a dramatic change.
Tesla used to have a price-to-sales ratio of less than 10.0X prior to 2020.
This single-digit valuation ratio has maintained at this level for nearly 5 years before it dramatically surged beyond one’s wildest dream.
In Dec 2019, Tesla’s stock valuation with respect to TTM sales began to soar.
Within about a year, Tesla’s price to sales ratio hit its peak at nearly 30.0X by Dec 2020, indicating that the company’s stock price was traded at 30 times its TTM sales.
However, the ratio declined steadily subsequently and reached about 17.0X as of March 2022.
At this ratio, Tesla’s valuation has gone significantly lower compared to its prior highs.
If anyone had noticed, Tesla’s stock valuation with respect to revenue was at an all-time low before its meteoric rise.
In 4Q 2019, Tesla’s price to sales ratio was only 3.0X.
At this ratio, Tesla’s stock was traded at only 3 times its TTM revenue.
If you had bought the stock when it was traded at this valuation, you 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 March 2022.
Tesla’s Price To Book Value Ratio
The chart above shows Tesla’s price to book value or shareholders’ equity for the period between 2016 and 2022.
Tesla’s book value is the net worth of the company.
Prior to 2020, Tesla’s price to book ratio has been mostly flat at roughly 10.0X between 2016 and 2019.
At this valuation, Tesla’s stock price was trading at about 10 times the company’s net worth.
Similar to the price to revenue ratio which we saw earlier, Tesla’s price to book ratio began its meteoric rise in 2020.
As of March 2022, Tesla’s stock price was traded at a market cap to book value ratio of about 30.0X.
At 30 times book value or net worth, Tesla was valued at a significant premium 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 1.0X as of March 2022.
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.
Tesla’s Price To Gross Profit Ratio
In terms of gross profit, Tesla’s valuation also experienced a similar trend as seen in the plot above.
As seen, Tesla’s market cap to gross profit has been roughly flat prior to 2020, averaging around 20.0X.
The price to gross profit ratio even declined to only 10.0X in 2019 4Q.
However, Tesla’s price to gross profit ratio did not stay at this low level for long and started to rise at the end of 2019 and reached nearly 140.0X by the end of 2020.
Before its dramatic ascent, investors noticed that Tesla’s valuation was too low and the stock was a buy due to its improving fundamentals and outlook.
At that time, Tesla’s gross profit was trending higher, pointing to the company’s improving business outlook.
As a result, Tesla’s valuation with respect to gross profit surged in line with other valuation ratios beginning in 2020.
As of March 2022, Tesla’s price to gross profit ratio has declined slightly to about 70.0X due mainly to the declining stock price.
Tesla’s 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, the EBIT does not cover interest expenses and taxes.
Nevertheless, Tesla’s price to EBIT or operating income ratio in the chart above soared beyond 300 throughout 2020 due mainly to the tiny operating profit that the company had generated.
At one point, Tesla’s stock was even traded at more than 450.0X its TTM operating profit.
As of March 2022, Tesla’s price to operating profit ratio dropped to 150X, driven partly by the declining stock price and also the improving operating profits in 2021.
The area in the chart where the ratio is zero indicates negative EBIT, meaning that Tesla did not make any profits in those periods.
Tesla’s Price To EBITDA Ratio
Another important variable that relates closely 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.
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 has had quite a dramatic fluctuation in the past.
For example, the ratio 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.
In 2019, Tesla’s stock was traded at a reasonable price to EBITDA ratio of around 20.0X.
Going into 2020, investors realized that Tesla’s valuation was too low as the company was delivering a stellar result in terms of vehicle sold.
Before long, Tesla’s price to EBITDA ratio took off by the end of 2019 and continued to surge for the rest of 2021 and reached above 100.0X by Dec 2021.
As of March 2022, Tesla’s stock was traded at about 80.0X its TTM EBITDA.
According to the chart, the best time to buy Tesla’s stock would be during mid of 2019 when the valuation with respect to EBITDA was at only 20.0X.
Again, if you had bought Tesla’s stock in mid-2019, your investment would have been worth 10X more now.
Tesla’s Price To Free Cash Flow Ratio
Free cash flow is another important metric that can be used to measure 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.
As such, I have created the chart above to track Tesla’s market cap to free cash flow ratio for the period from 2016 to 2022.
Based on the chart above, the majority of the ratio is at 0.
The reason is that Tesla had failed to generate any positive free cash flow in these periods.
Nevertheless, Tesla started to generate a tiny bit of free cash flow in June 2019 as seen from the surging price to free cash flow ratio which reached more than 300X.
As Tesla improved its free cash flow generation in 2019, the ratio slowly declined and reached less than 50X by the end of 2019.
Subsequently, Tesla’s price to free cash flow ratio continued to soar and topped out at more than 450X in 4Q 2020.
While Tesla’s free cash flow has increased in these periods, the ratio did not drop.
The reason is that Tesla’s surging stock prices far outpaced the rate of increases in free cash flow.
As of March 2022, Tesla’s valuation has declined to a reasonable 190X of its TTM free cash flow.
Tesla’s Price To Earnings (PE) Ratio
One last valuation ratio that is as important as the free cash flow ratio is the price-to-earnings ratio or PE ratio.
The net earnings are the net income or net profit available to common stockholders.
The net earnings dictate the price of Tesla’s stock.
While the net earnings or net profits are an important metric when it comes to Tesla’s valuation, the company seems to be only making a profit in recent quarters.
According to the chart above, Tesla’s price to earnings or PE ratio has been mostly nill prior to 2020.
Tesla has only managed to generate positive net income starting in 2Q 2020 from a TTM perspective.
To make matter worse, Tesla makes only very small profits.
As a result, Tesla’s PE ratio has been on an extreme level as shown in the chart.
As seen, Tesla’s price-to-earnings ratio debuted at 800 in 3Q 2020 and soared beyond 1,600 by Jan 2021.
However, Tesla’s PE ratio has dropped to a more reasonable value as of March 2022 to only 180X, a far lower value compared to its historical highs
In short, Tesla’s price-to-earnings ratio has been at an extreme level, indicating the extraordinary valuation the company has been having.
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 $1 trillion by March 2022.
Prior to 2021, Tesla’s market capitalization actually soared beyond $800 billion, illustrating the extreme valuation the company had before.
Tesla’s growth in valuation has probably gone too fast and too much in such a short period of time, especially in 2020 when the stock has surged more than 1000% alone.
While Tesla’s valuation has declined considerably from its prior highs as of March 2022, it’s still extremely overvalued from a historical basis.
As of March 2022, Tesla’s price to revenue, price to gross profit, price to book value, price to free cash flow as well as the price to earnings ratio were still at an extreme level although they had already declined considerably from their prior highs.
In the meantime, Tesla’s peers such as Toyota, GM and Ford were trading slightly above their book values as of March 2022.
Similarly, their valuation with respect to other metrics including sales and earnings was also in line with their historical averages as of March 2022.
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 a record low.
In June 2019, Tesla’s stock price was only $50 per piece after the 5-to-1 split.
As of March 2022, Tesla’s stock was worth nearly $1000 per piece, giving a return on investment of over 10X.
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 on Tesla’s stock valuation.
References and Credits
1. All financial figures in this article were obtained and referenced from the following websites:
2. Featured images in this article are used under creative commons license and sourced from the following websites: Paulius Malinovskis.
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