(Michael Li & Khalid Nazir)
In recent weeks Tesla has overtaken Toyota as the largest automobiles company in terms of market capitalisation standing at $224.18 billion compared to Toyota’s $174.59 billion. This is an incredible feat considering Tesla didn’t exist prior to 2010 and has only been commercially operating for less than 10 years compared to Toyota, a company founded 82 years ago. Much of Tesla’s USP resides with their charismatic and impulsive CEO, Elon Musk, whose recent tweets wiped off $14billion from Tesla’s market value for claiming his own company’s share price is far too high to be justified. The unique dynamic Elon brings to Tesla is as much a burden as brilliance for the company however, as despite his erratic nature, analysts firmly believe that the company value will continue to rise in the future.
| Tesla, Inc. | 2016 | 2017 | 2018 | 2019 | Current |
| Price/Sales | 4.43 | 4.37 | 2.68 | 3.03 | 9.82 |
| Price/Earnings | -43.97 | -26.41 | -56.60 | -82.5 | -588.76 |
| Price/Free Cash Flow | -10.48 | -5.69 | -15.18 | -697.22 | 6449.03 |
| Price/Book | 6.23 | 10.04 | 10.00 | 10.14 | 25.69 |
| Debt/Equity | 1.06 | 1.80 | 1.63 | 1.56 | 1.07 |
| PEG Ratio | 2.08 | 1.02 | 1.52 | -1.63 | 5.06 |
| Earnings Yield % | -0.70 | -2.72 | -0.50 | -0.00 | 0.41 |
| Enterprise Value (Bil) | 48.56 | 51.75 | 54.43 | 98.21 | 264.32 |
| Enterprise Value/EBITDA | 129.84 | 544.74 | 32.55 | 43.21 | 77.46 |
Looking at Tesla’s key financial ratios, multiple areas of interest arise that may be surprising to potential investors, such as the consistently negative Price/Earnings (P/E) ratio. P/E is defined as the given price of a share divided by the given earnings per share (EPS). From this information we can therefore conclude that investors are losing money per share invested suggesting that over the past 5 years investors have not made any money. This may seem concerning but given Tesla’s relatively new formation it is understandable as the company will need time to be fully profitable and cover equity payments.
Current and potential new shareholders should be reassured however by Tesla’s strong projections for the future as the company’s forecasted annual earnings growth stands at 55.1% compared to the industry and market earnings growth of 52.8% and 22.8%, respectively, over the same period. These strong forecasts also indicate that by 2021 Tesla’s EPS will break the 0 mark and enter positive returns potentially reaching a height of an EPS of $24 by 2024 and delivering a strong 27.3% return on equity (ROE) by 2023. These indicators are supported by multiple analyst insights and recent growths during a turbulent period within the market indicate that investors have faith in Tesla and these forecasts.
Another key reason for Tesla’s ascension over the past decade is due to its continuously healthy financial situation. Tesla’s Debt to Equity over the past 5 years have been consistently low with the most recent figures being its lowest ever at 1.07. The Debt to Equity (D/E) ratio is calculated by dividing a company’s total liabilities by its shareholder equity. A low D/E ratio suggests that Tesla has been growing organically without much borrowing of funds and this can be seen with its ever-increasing sales of its electric cars, especially with the introduction of the Tesla Model 3 (a car specifically designed to target the mass market) in 2016, consistently featuring in the top 3 electric cars sold across the globe. Furthermore, Tesla’s short-term assets of $14.9B, covers both short term and long- term liabilities standing at $12.0B and $14.6B respectively suggesting in the event of company liquidation all parties will be covered. The strong financial health at Tesla indicates careful planning by the senior management which goes to reassure all parties involved with the company and sends strong signals of confidence to those looking to invest.
Conclusion:
The future of Tesla also looks bright with the recent introduction of the Tesla Model Y, its mass market vehicle for the popular SUV market within the consumer vehicle industry. It is expected to outperform it’s the firms very own successful Model 3 in terms of pure sales, which can justify the ever-increasing stock price of Tesla. It is also important to note that Tesla is technologically 6 years ahead of its competitors including the two largest being Toyota and Volkswagen in the automobile industry. Plus, the fact that more consumers are aware of climate change than ever before and are taking their part in making a difference, and as sustainable investments, such as ESG, are gaining more traction by the day, Tesla seems like an excellent proposition in the green space, by being the only manufacturer that produces electric vehicle that produce zero emissions within the automobile industry.
Tesla are part of a handful of firms who have not only recovered their stock prices from March’s low, due to the COVID-19 pandemic, but are now at all-time highs with the likes of Apple and Amazon. As some analysts have said, this could be because investors may see Tesla as a tech company first rather than an automobile manufacture. This could be proven by the fact that Tesla are able to enhance the performance and features of the car through software updates such as faster acceleration or increasing the range of their cars, much like that of Apple updating their iPhones and Macs. However, it is important to note that many analysts predict that Tesla may be in a stock bubble right now, not helped by the fact that Tesla now has shorts that amass over $20 billion bet against the stock according to research firm S3 partners (Bloomberg 2020). Many analysts consider Tesla to be overvalued but do not rule out the possibility of its price moving higher. During the current down cycle firms are looking to restructure drastically with the aim to make the company less prone to shocks in the future. Given this and Tesla’s extremely healthy financials we at Orchid strongly recommend investors to BUY.
Industry Jargon:
Market Capitalisation – the value of a company that is traded on the stock market, calculated by multiplying the total number of shares by the present share price.
Earnings per Share (EPS) – Earnings per share (EPS) is calculated as a company’s profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company’s profitability. The higher a company’s EPS, the more profitable it is considered.
Price/Earnings (P/E) Ratio – P/E is defined as the given price of a share divided by the given earnings per share (EPS) at the same time. P/E ratios are used by investors and analysts to determine the relative value of a company’s shares in an apples-to-apples comparison. It can also be used to compare a company against its own historical record or to compare aggregate markets against one another or over time.
Return on Equity (ROE) Ratio – Return on equity (ROE) is a ratio that provides investors with insight into how efficiently a company (or more specifically, its management team) is handling the money that shareholders have contributed to it. The higher the ROE, the more efficient a company’s management is at generating income and growth from its equity financing (the process of raising capital through the sale of shares)
Debt to Equity (D/E) Ratio – The debt-to-equity (D/E) ratio is calculated by dividing a company’s total liabilities by its shareholder equity. It is used to evaluate a company’s financial leverage (i.e. how much of the firm is growing by using its own equity rather than borrowed funds)
ESG Investing – Environmental, social and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
Sources:
Simply Wall St. 2020. Tesla (Nasdaqgs:TSLA) – Share Price, News & Analysis – Simply Wall St. [online] Available at: <https://simplywall.st/stocks/us/automobiles/nasdaq-tsla/tesla#past> [Accessed 10 July 2020].
Marketscreener.com. 2020. TESLA, INC. : Financial Data Forecasts Estimates And Expectations | TSLA | Marketscreener. [online] Available at: <https://www.marketscreener.com/TESLA-INC-6344549/financials/> [Accessed 10 July 2020].
Macrotrends.net. 2020. Tesla Debt To Equity Ratio 2009-2020 | TSLA. [online] Available at: <https://www.macrotrends.net/stocks/charts/TSLA/tesla/debt-equity-ratio> [Accessed 10 July 2020].
Research, Z., 2020. Tesla Inc (TSLA) Earnings Yield (TTM) – Zacks.Com. [online] Zacks Investment Research. Available at: <https://www.zacks.com/stock/chart/TSLA/fundamental/earnings-yield-ttm> [Accessed 10 July 2020].
Bloomberg.com. 2020. Bloomberg – Are You A Robot?. [online] Available at: <https://www.bloomberg.com/news/articles/2020-07-09/tesla-shorts-to-amass-first-ever-20-billion-bet-against-a-stock> [Accessed 10 July 2020].
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