Stock Valuation: Tesla Inc. (TSLA)

Name of Company Country of Origin/ Exchange Traded Sector Stock Price    
TESLA INC US/NAS Consumer Cyclical – Autos – Auto Manufacturers USD291.72    
@ 02 Jun 2018    
COMPANY PROFILE Tesla Inc is a vertically integrated sustainable energy company. It designs, develops, manufactures and sells high-performance fully electric vehicles and electric vehicle powertrain components.

Founded in 2003 and based in Palo Alto, California, Tesla is a vertically integrated sustainable energy company that also aims to transition the world to electric mobility by making electric vehicles. It sells solar panels and solar roofs for energy generation plus batteries for stationary storage for residential and commercial properties including utilities. The Tesla Roadster debuted in 2008, Model S in 2012, Model X in 2015, and Model 3 in 2017. Global deliveries in 2017 were 103,184 units. Tesla went public in 2010 and employs nearly 40,000 people.

Stock Code TSLA    
Stock Valuation Below                  

Companies that are trading at high Price to Sales ratios, like this company, do so because historical revenue growth has been high and investors are optimistic about future revenue growth. However, no company can continue to register the same high growth rates forever. Eventually it gets much bigger and growth rate will slow down. When that happens, one should adjust the expected future Price to Sales ratio in response to the expected slowdown in revenue growth and see if the current stock price is still justified, as what we have done below.
At the price of USD291.72 as at 02 Jun 2018, Tesla Inc is trading at a Price to Sales Ratio of 3.1 times last 12 months sales.  This is a 44.0%  discount to its historical average Price to Sales Ratio of 5.6 times. 
Is the stock undervalued? One should not just look at one indicator to determine the fair value of a stock. 
ProThinker believes in using a combination of valuation methods to decide whether a stock is over or undervalued? The five ratios we use are Price to Earnings, Price to Sales, Price to Cash Flow, Price to Book and Dividend Yield. We use multiple methods to value a stock because each has its benefits as well as shortcomings. Price to Earnings and Price to Cash Flow Ratios relate stock price to profitability but are meaningless when the comany has negative earnings or cash flows. Price to Sales Ratio is more stable because sales are never negative. However, this does not tell us whether the company is able to sell profitably. Price to Book Ratio gives us an indication as to how much we are paying for the company’s assets but it is not directly related to the company’s profitability. Dividend Yield cannot be used for companies that are paying little to no dividends.
While it is important to value stocks based on multiple valuation methods, this often leads to differing views on valuation. One indicator may suggest that a stock is overvalued while another suggest that it is undervalued. This does not help an investor who needs to make a definite decision whether to buy, hold or sell the stock. That is why we advocate the use of a Composite Valuation Indicator, which is derived from the best combination of the five indicators above. A Composite Valuation Indicator will give you ONE conclusion on whether a stock is under or over valued. 
To find out more about our valuation methodology, click here.             
In the case of Tesla, since there are no dividends and the company is not expected to make a profit until 2020, it is not possible to incorporate these indicators into the overall stock valuation. Therefore, relying only on Price to Sales Ratio is dangerous. If we were to take its current price divided by 2020’s earnings, PE stands at around 30x, which is high compared to the market.
Source of Data: Price to Sales chart is from ProThinker Stock Report. Company description, historical financial statements data and price data are from gurufocus.com. Estimates are from gurufocus and/or 4-traders.com – Thomson Reuters.
Disclaimer: This report is for information purposes only and should not be considered a solicitation to buy or sell any security. Neither ProThinker nor any other party guarantees its accuracy or makes warranties regarding results from its usage. Redistribution is prohibited without the express written consent of ProThinker. Copyright(c) 2018. All rights reserved. 

Leave a Reply

Your email address will not be published. Required fields are marked *