Why Tesla high P/E ratio is justifiable
1) The chart shows the implied P/E ratio for Tesla based on Tesla’s next 4 unreported quarter. In other words, this is the resulting P/E ratio if consensus estimates were accurate.
2) Over long periods of time Tesla was valued mostly at or near 71x times later actually delivered earnings. Tesla has been trading at a significant premium. Even most high performing tech stocks trade only around 35x to 45x. We can call this valuation outperformance the Tesla premium (TP).
3) As long as Elon runs Tesla, it appears unlikely the TP will go away. Both small and large investors recognize that it is unwise to ‘bet against Elon’. Investing with Elon tended to be the winning strategy.
4) The key insight is that any amount of incremental Tesla earnings is valued extremely highly, ie near 71x mark across most trading days. This implies that as soon as energy storage earnings, earnings from the upcoming lower cost vehicles, or even first FSD earnings are being included in estimates, the share price impact will be significant.
5) To double in market value from current $0.7T to $1.4T, Tesla only needs to generate approximately $1.42 per quarter in EPS estimates. Catalysts that could trigger an increase in EPS include:
•New lower cost vehicle launch
•Energy storage growth (Shanghai Gigafactory about to launch MP production in early 2025)
•FSD
•Continued global EV adoption
It appears highly likely that in one year around August 2025, the next 12 months EPS outlook will have increased to an average EPS $1.46 per quarter or doubling in share price over the next 12-18 months.
6) Fundamental cash flow analysis like Discounted Cash Flow (DCF) consistently miss out on stocks like Tesla. DCF approach, which is overly simplified and ignore potential growth, eliminates any high consistent P/E stock.
2) Over long periods of time Tesla was valued mostly at or near 71x times later actually delivered earnings. Tesla has been trading at a significant premium. Even most high performing tech stocks trade only around 35x to 45x. We can call this valuation outperformance the Tesla premium (TP).
3) As long as Elon runs Tesla, it appears unlikely the TP will go away. Both small and large investors recognize that it is unwise to ‘bet against Elon’. Investing with Elon tended to be the winning strategy.
4) The key insight is that any amount of incremental Tesla earnings is valued extremely highly, ie near 71x mark across most trading days. This implies that as soon as energy storage earnings, earnings from the upcoming lower cost vehicles, or even first FSD earnings are being included in estimates, the share price impact will be significant.
5) To double in market value from current $0.7T to $1.4T, Tesla only needs to generate approximately $1.42 per quarter in EPS estimates. Catalysts that could trigger an increase in EPS include:
•New lower cost vehicle launch
•Energy storage growth (Shanghai Gigafactory about to launch MP production in early 2025)
•FSD
•Continued global EV adoption
It appears highly likely that in one year around August 2025, the next 12 months EPS outlook will have increased to an average EPS $1.46 per quarter or doubling in share price over the next 12-18 months.
6) Fundamental cash flow analysis like Discounted Cash Flow (DCF) consistently miss out on stocks like Tesla. DCF approach, which is overly simplified and ignore potential growth, eliminates any high consistent P/E stock.
My Take: This is an updated version to explain why Tesla high P/E ratio is justifiable and DCF may not reflect the true intrinsic value of Tesla stock. You can read my previous sharings here:
1. Know the limitation to P/E ratio and look at Tesla's growth potential
2. DCF may not reflect the true intrinsic value of Tesla stock
1. Know the limitation to P/E ratio and look at Tesla's growth potential
2. DCF may not reflect the true intrinsic value of Tesla stock
Source:
$BYD COMPANY (01211.HK)$ $BYD Co. (BYDDF.US)$ $S&P 500 Index (.SPX.US)$ $Nasdaq Composite Index (.IXIC.US)$ $Tesla (TSLA.US)$ $VOLKSWAGEN A G (VWAGY.US)$ $NIO Inc (NIO.US)$ $Li Auto (LI.US)$ $XPeng (XPEV.US)$ $General Motors (GM.US)$ $Ford Motor (F.US)$ $Rivian Automotive (RIVN.US)$ $MERCEDES-BENZ GROUP AG (MBGAF.US)$ $TOYOTA MOTOR CORP (TOYOF.US)$ $GEELY AUTO (00175.HK)$ $Stellantis NV (STLA.US)$
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I reflected trading experiences by writing journals. My comments are for educational purposes not financial advice.
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