{"id":74956,"date":"2020-06-26T05:22:02","date_gmt":"2020-06-26T05:22:02","guid":{"rendered":"https:\/\/essays.homeworkacetutors.com\/valuation-and-financial-analysis-of-tesla\/"},"modified":"2020-06-26T05:22:02","modified_gmt":"2020-06-26T05:22:02","slug":"valuation-and-financial-analysis-of-tesla","status":"publish","type":"post","link":"https:\/\/www.colapapers.com\/us\/valuation-and-financial-analysis-of-tesla\/","title":{"rendered":"Valuation and Financial Analysis of Tesla"},"content":{"rendered":"
\n

Is Tesla overvalued?<\/h3>\n

1. Introduction<\/h2>\n

Tesla Inc, an American automaker, energy storage company was founded by Martin Eberhard and Marc Tarpenning in 2003 based in Palo Alto, California. Intentionally departed from traditional automakers, Tesla specializes in designing and manufacturing<\/a> high-performance fully electric vehicles, energy storage battery and residential photovoltaic panels. <\/p>\n

The
\nfirst product with lithium-ion battery cells the company manufactured is The
\nRoadster. And then the company keeps rolling out new
\nfeatures of on-going products: Model S, Model X and Model 3, which are
\nexceeding the imagination of its customers. Model S is the
\nbest-selling product with global sales of over 197,600 units between June 2012
\nand September 2017, followed by the Model X.[1]<\/a><\/p>\n

On 29th<\/sup> June 2010, Tesla launched its Initial
\nPublic Offering on Nasdaq at a price of $17 per share and raised $226million in
\ntotal, which makes Tesla the first American automaker company to achieve this
\nafter Ford Motor Company (1956). Since then, the share price of Tesla has
\nskyrocketed to around $320 as of 31st<\/sup> October 2017. Even
\nits CEO Elon Musk said, \u2018It\u2019s higher than we have the right to deserve\u2019. <\/p>\n

Tesla\u2019s share price reaction to key events<\/strong><\/p>\n

\"\"
(Yahoo Finance, 2017)<\/figcaption><\/img><\/figure>\n

2. ANALYSIS<\/h2>\n

2.1 SWOT Analysis<\/h3>\n

(S)trength<\/h3>\n

Leading Position in the Pure Electric Vehicle Market: Tesla is delivering innovative new technologies to transform the way we drive. Tesla\u2019s biggest advantage<\/a> lies in its technical capacity, it has several automotive design and battery technology patents, as it invested over 17% of revenues in the Research & Development Department. Although Tesla is not the only automaker that offers electric vehicles, it plays a leading role in the market for luxury, long-range electric automobiles, which is distinct from the market for luxury gas-powered vehicles.<\/p>\n

(W)eakness<\/h3>\n

The weaknesses of Tesla mainly lie in two aspects. On one
\nhand, compared with traditional cars, Tesla\u2019s ability to undertake the risk is
\nrelatively lower. Once there are slight ups and downs in the demand for
\nelectrical cars or production delay occurs, Tesla will probably suffer a huge
\nloss. On the other hand, Tesla Model S occurred fire 6 times by the end of 2014
\ndue to the battery safety which is below public standard. The potential battery
\nhazard will cause adverse influence on Tesla\u2019s market capitalization. In
\naddition, the popularization of charging stations in many areas need further
\ndevelopment, of which the process may take several years to implement. In other
\nwords, as the significant foundation of Tesla\u2019s development, the supportive
\ninfrastructure is insufficient so that cannot attract more potential consumers
\nand the sales amount will be largely limited.<\/p>\n

(O)pportunities<\/h3>\n

The electric vehicles market has experienced a significant
\ngrowth over the past years since in many countries the local government
\nencourages the usage of the environmentally friendly vehicles. For example, in
\nNetherlands and Norway electric vehicles enjoy reduction on registration and
\ncirculation taxes, as well as privileged access to bus lane. Therefore, Tesla\u2019s
\nhigh concentration on
\nelectric vehicles market is more likely to promote profitability.<\/p>\n

(T)hreats<\/h3>\n

As the electric vehicle market is a fast-growing market,
\nmore and more automakers are producing environmental friendly vehicles, which
\nwill decrease Tesla\u2019s market share in the electric vehicle industry. Although
\nTesla plays a leading role in the electric vehicles market, in terms of size
\nand awareness it is far from other automakers like BMW, Porsche. The general
\nautomotive industry is always highly competitive. Under the current
\ncircumstance, electric vehicles must compete within the entire automotive
\nindustry. Compared to the pure Electric Vehicles, people are more inclined to
\nchoose the hybrid electric since customers are also concerned about the range
\nand the charging times of their batteries. These potential issues will
\nadversely affect market share for the electric vehicles. Therefore, Tesla is competing
\nwithin the whole automotive industry. High industrial competition would
\nprobably result in price reductions and potential losses, which could harm
\nTesla as it does not have the economy of scale that the other manufacturers
\nhave.<\/p>\n

From the SWOT analysis, it could be indicated that the demand for Tesla will be largely limited in the current situation due to high industrial competition, insufficient charging stations infrastructure and its potential battery hazard despite of its strengths and opportunities mentioned above. Therefore, low demand will result in decreased prices, which could indicate the overvaluation of Tesla.<\/p>\n

2.2 Comparable Analysis<\/h3>\n

In contrast to the
\nabsolute valuation model such as dividend discount model and discounted cash
\nflow model, the relative valuation model compares the company\u2019s price multiples
\nor ratios to a benchmark or other similar companies to determine whether the
\ncompany is relatively undervalued or overvalued. We think the relative
\nvaluation model is more suitable to evaluate the valuation of Tesla, because
\nTesla has no dividends and its net income and free cash flow both are always
\nnegative (Morningstar 2017). The financial data information is acquired from
\nMorningstar that is shown in the Exhibit 1. We will evaluate if Tesla is
\novervalued through by the comparison with benchmark and the comparisons at each
\nsector with other companies.<\/p>\n

2.2.1 Benchmark comparable<\/h4>\n

The
\nprice to sale ratio (P\/S) is most relevant when used to compare companies in
\nthe same industry. A low ratio may suggest that the company is undervalued,
\nwhile the ratio which is significantly higher than the average may indicate as
\novervaluation. Table 4A shows that Tesla\u2019s P\/S ratio is greatly higher than the
\nbenchmark of S&P 500, also is far more than the industry average. The
\nhighest ratio of Tesla has reached 13.9 in 2011, while the benchmark is only
\n1.2. It is eleven times larger than the benchmark. And the lowest ratio of
\nTesla is at least twice as high as the benchmark.<\/p>\n

\"\"
Price\/Sales ratio compared with S&P 500<\/figcaption><\/img><\/figure>\n

The
\nprice to book ratio (P\/B) can be used for the company with positive book values
\nand negative earnings because negative earnings make price to earnings ratio
\n(P\/E) ineffective. It is adapted to the Tesla\u2019s situation. Likewise, a low
\nratio may mean that the company is undervalued, and the high ratio may be
\novervalued. It could be seen in the table 4B that the P\/B ratio of Tesla is
\nextremely higher than the benchmark of S&P 500. The gap of P\/B ratio
\nbetween Tesla and benchmark is greater than the extent at P\/S ratio. Two
\nhighest ratios of Tesla have severally attainted at 31.1 and 32.8 in 2012 and
\n2013, while the corresponding ratio of benchmark are 2.1 and 2.6. Tesla\u2019s
\nlowest ratio is 10.2 in 2010, which is five times as high as the benchmark.<\/p>\n

Price\/Book ratio compared with S&P 500<\/strong><\/p>\n

\"\"<\/figure>\n

Tesla\u2019s
\nP\/S ratio and P\/B ratio are both significantly higher than the benchmark of
\nS&P 500. This suggests that Tesla may be overvalued. We will get through
\nthe comparison at each sector to further confirm whether Tesla is overvalued or
\nnot.<\/p>\n

Tesla\u2019s
\nfinancial data information<\/strong><\/p>\n

\"\"<\/figure>\n

2.2.2 Each sector comparable<\/h4>\n

As the auto
\nindustry has abnormally low multiples, Tesla looks overvalued compared to other
\nmajor automakers on the Price to Sales, Price to Book and EV\/EBITDA multiples,
\nwhen compared to company\u2019s like General Motors, Ford, Toyota, Volkswagen, Honda<\/p>\n

\"\"<\/figure>\n

However,
\nwhen we account for top-line growth, it is clear why the market affords Tesla
\nan optimistic multiple, and when we look at bottom line growth via the P\/E
\nratio, Tesla looks undervalued compared to comparable firms in the auto
\nindustry, as Tesla has a very low P\/E multiple<\/p>\n

\"\"<\/figure>\n

As, Tesla is being valued as a mega-cap tech firm because of its high-tech niche within the auto industry and its diversification into renewable energy, so when the company is compared to other large-cap tech firms like Apple, Google, Microsoft and Amazon, its multiples look a bit fair as we could see in the chart below that companies like Microsoft and Google have a higher Price to Sales Ratio as compared to Tesla and other big fishes in the market from these analysis we can say Tesla is undervalued when compared to the Tech industry.<\/p>\n

\"\"<\/figure>\n

The EV\/EBITDA ratio is a valuation indicator that compares a company\u2019s overall value to its operational earning power, as it specifies whether a company may be undervalued or overvalued in comparison to industry peers, as the ratio considers both, the company operational earning (EBITDA vs. Net Profit) and a company overall value indicator that also includes financial debt, cash position and minority interests which are key indicators when valuing a firm market value. (Enterprise Value vs. Market Capitalization), thus is a more precise measure than the Price-Earnings(P\/E) ratio. The EV\/EBITDA ratio of Tesla Inc. is significantly higher than the median of its peers (9.98). According to this financial ratios Tesla Inc.\u2019s valuation is way above the market valuation of its peer group.<\/p>\n

3. Institutional Investors and insider trading<\/h2>\n

We decided to
\nconsider the recent activity of institutional investors regarding the trading
\nof Tesla stock. This is important due to the possibility of institutional
\nownership signalling stronger fundamentals. Mutual funds, pension funds, banks
\nand other financial institutions make money through their ability to generate
\nreturns through employing the use of analysts and researchers. According to a
\n2003 study, there was a correlation between changes in institutional ownership
\nand stock returns over each quarter from the years 1980 to 1994 (Gibson 2003).
\nInstitutional ownership currently accounts for 56.87% of Tesla\u2019s shares
\noutstanding. The most recent quarterly filings reveal institutional holdings
\nincreased by 5,156,362 shares, and decreased by 15,736,105 (NASDAQ 2017). The
\nnumber of holders generating these changes were 387 increasing their position,
\nand 268 decreasing their position. This indicates that a smaller number of
\ncompanies and funds were making larger trades. This is a net institutional
\nownership decrease of 11.37%, a sign that institutions have a pessimistic
\noutlook towards the company. Therefore, the latest quarterly data on
\ninstitutional investors signals the notion that Tesla is overvalued. <\/p>\n

As well as
\ninstitutional investors, insights can also be drawn from the trades of
\ninsiders. Company senior officers and directors have greater access to
\ninformation regarding the profitability of Tesla. Over the last three months,
\nthere have been two open market buys and nine open market sells by Directors
\nand Officers at Tesla. 5,508 shares have been bought, and 56,626 shares have
\nbeen sold (NASDAQ 2017). This can be contrasted with the past twelve months,
\nwith 2,948,726 shares bought by insiders, and 716,347. The recent shift may
\nindicate that the insiders of Tesla regard the past year\u2019s increase in price
\nfrom below $200 to well over $300 has been an overreaction by the market, and a
\nfuture correction will occur. A recent 2017 study found firms which exhibit net
\nselling before a downgrade have significantly lower returns the subsequent year
\ncompared to firms with net buying or no net trading by insiders (Hill et al
\n2017). Whilst Tesla may or may not be subject to a downgrade, the activity of
\ninsiders is certainly valuable information to consider.<\/p>\n

Lastly, over the
\nlast three months Tesla has exhibited a significant positive put\/call open
\ninterest ratio. This signals that the market is bearish on Tesla stock. The
\nlatest figure has the open interest ratio at 1.42. <\/p>\n

\"\"<\/figure>\n

As shown above,
\ncurrent market interest indicates a bearish sentiment for Tesla due to a net
\ndecrease in institutional holdings, net selling by insiders and a positive
\nput\/call open interest.<\/p>\n

4. Investment Recommendation<\/h2>\n

Giving an investment recommendation on Tesla Motors can be slightly
\ngrim, as there are a few factors to be taken into consideration, For example,
\nthe excitement around Elon Musk and the extreme amount of ambiguity about its
\nrecent growth. The fact that Tesla is not currently paying dividends, nor has
\nany plans to do it in the future.\u00a0 One
\nmight suggest Tesla is an overvalued firm. However, this does not indicate that
\nthe stock will not perform in the long-term, but it is extremely exposed to
\nprice drops in the future. Tesla could be the leader in electric automobile
\nmanufacturing. While now, Tesla\u2019s stock is not a buy, it could be classified as
\na hold or even something that investors should wait to capitalize on if a price
\ndrop occurs.\u00a0 In conclusion, Tesla is a
\ngrowing company that investors should kept their eyes \u00a0on. Also, one cannot forget to mention that
\nCEO, Elon Musk is a force to be reckoned with in the technology industry. <\/p>\n

5. Conclusion<\/h2>\n

After extensive findings our group feels the investment into the company of Tesla Motors would be best, if one waited upon purchase. The company is highly overvalued with their stock prices. It is our suggestion to see what the future holds for Tesla. Tesla is predicted to make a huge jump within the next few years. These predictions make the investment process a gamble. In conclusion, we all can predict the country is looking for environmentally friendly transportation. Once this eco-friendly trend takes off, Tesla Motors will be the automotive company leading the pack. <\/p>\n

Sources<\/h2>\n