Is Tesla (TSLA) Still Overvalued?

Tesla (TSLA) stock has fallen by 1.1 % this afternoon. At $123.18 per share, the company is overvalued — but it's essential that potential investors consider the company's strong growth indicators and positive market sentiment before committing.

Tesla, Inc. designs, develops, manufactures, leases, and sells electric vehicles, and energy generation and storage systems in the United States, China, and internationally. The large-cap Consumer Cyclical company has 99,290 full time employees and is based in Austin, United States.

TSLA Has a Higher P/E Ratio Than the Sector Average

Compared to the Consumer Cyclical sector's average of 24.11, Tesla has a trailing twelve month price to earnings (P/E) ratio of 37.7 and an expected P/E ratio of 22.9. The P/E ratios are calculated by dividing the company's share price by its trailing 12 month of $3.27 or forward earnings per share of $5.38.

Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Tesla's P/E ratio is higher than its sector average of 24.11, we can deduce that the market is overvaluing the company's earnings.

TSLA Has an Alarming P/B Ratio

The price to book (P/B) ratio of a company is a comparison of the company's market capitalization versus its net asset, or book value. A ratio lower than 1 tells you that the equity market is undervaluing the book value of the company's assets, and ratios higher than 1 tell you that the equity markets are overvaluing the company in terms of its assets.

Of course, a company is worth much more than its assets alone, so the focus on P/B ratio is mainly to enable investors to single out undervalued securities that offer a margin of safety. Since Tesla's P/B ratio of 9.8 is higher than its sector average of 3.11, such a margin of safety does not exist for the stock.

TSLA Is Generating Cash**

Tesla has decent free cash flows. This represents the actual cash that the company is generating from its sales revenues, minus its re-investments in the business (capital expenditures). The company's operating cash flows have an average growth rate of 120.3%, compared to 136.4% for capital expenditures. From the table below we can also see that the free cash flows has an average growth rate of 104.0% and a coefficient of variability of 54.0%:

Date Reported Cash Flow from Operations ($ MM) Capital expenditures ($ MM) Free Cash Flow ($ MM) YoY Growth (%)
2021-12-31 11,497 -8,014 3,483 28.95
2020-12-31 5,943 -3,242 2,701 179.03
2019-12-31 2,405 -1,437 968 n/a

Tesla's Is a Profitable Business

If you are looking to make TSLA a long term investment, it's essential that you understand the viability of its business through a study of its margins. Gross margins tell you how much the company makes in profit when only the costs directly related to producing the goods or delivering the service are taken into account. Operating margins, on the other hand, factor in overhead costs so they tell you how effectively Tesla is run.

Tesla's Gross Margins

Date Reported Revenue ($ MM) Cost of Revenue ($ MM) Gross Margins (%) YoY Growth (%)
2021-12-31 53,823 40,217 25.28 20.27
2020-12-31 31,536 24,906 21.02 26.93
2019-12-31 24,578 20,509 16.56 n/a

Tesla's Operating Margins

Date Reported Total Revenue ($ MM) Operating Expenses ($ MM) Operating Margins (%) YoY Growth (%)
2021-12-31 53,823 7,110 12.07 90.98
2020-12-31 31,536 4,636 6.32 1815.15
2019-12-31 24,578 3,989 0.33 n/a

Tesla's cost of revenue is growing at a rate of 41.5% in contrast to 34.8% for operating expenses. Sales revenues, on the other hand, have experienced a 49.5% growth rate. As a result, the average gross margins growth is 23.6 and the average operating margins growth rate is 953.1, with coefficients of variability of 20.8% and 94.1% respectively.

Tesla Benefits From Positive Market Signals

The market sentiment regarding Tesla is overwhelmingly positive. The stock has an average rating of buy and target prices ranging from $436 to $24.33. TSLA is trading -49.44% away from its target price of $243.62. 2.8% of the company's shares are tied to short positions, and 45.7% of the shares are held by institutional investors.

Holder Shares Date Reported Percentage Value
Vanguard Group, Inc. (The) 213,024,517 2022-09-29 7% $26,240,360,069
Blackrock Inc. 171,860,959 2022-09-29 5% $21,169,832,982
State Street Corporation 99,647,239 2022-09-29 3% $12,274,546,930
Capital World Investors 90,161,776 2022-09-29 3% $11,106,127,595
Geode Capital Management, LLC 47,495,728 2022-09-29 2% $5,850,523,789
Price (T.Rowe) Associates Inc 46,956,884 2022-09-29 1% $5,784,148,985
FMR, LLC 38,428,902 2022-09-29 1% $4,733,672,160
Jennison Associates LLC 29,557,607 2022-09-29 1% $3,640,906,039
Baillie Gifford and Company 27,876,833 2022-09-29 1% $3,433,868,297
Northern Trust Corporation 26,602,278 2022-09-29 1% $3,276,868,612
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.