What’s Driving Tesla’s Value?

by | Nov 2, 2020 | Linkedin Articles | 0 comments

Tesla, one of the more controversial stars of the US stock market recently announced its third quarter results. Having beaten its revenue and profit estimates, the stock jumped 5% while already being up over 380% this year alone. This has led to the company’s market capitalisation increasing from $74bn to $386bn, at the time of writing, over the course of this year.

Though not a perfect measure of value, Tesla’s market capitalisation means it’s now one of the biggest car companies globally. In fact, the value of Tesla is more than Toyota, Ford, Volkswagen (VW), Daimler and Honda combined. Together, these six companies last year produced or sold more than 32 million vehicles, while Tesla’s annual production capacity is still less than 1 million.

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The market capitalisation of Tesla compared to other automobile manufacturers is even more impressive when we consider Tesla’s latest results.  They recently announced a profit for the fifth consecutive quarter, and over Q3 2020 generated a net income of $331 million while producing over 145,000 vehicles. In comparison over the same period, VW, whose market capitalisation is just over a fifth of Tesla’s, produced over 2.4 million vehicles and generated more than $3.2bn of net income.  

Using earnings per share (EPS), which is simply the net income produced per share, we can see that VW has an EPS of $6.06, while Tesla only generated $0.76 per share. Clearly, Tesla’s value is not being driven by fundamentals (earnings, profits, cashflows etc.) but instead by expectations and in some way speculation.

Investors have continued to bid up Tesla’s stock price as the company not only beats the estimates set by Wall Street analysts, but also increased their market share of electric vehicle sales. However, it is not just this, but also the potential growth of Tesla that is driving demand for its shares. They are beginning to expand into a potentially more lucrative market of trucking and pick-ups, while also being at the forefront of sustainable energy generation and storage and increasing production capacity of their most affordable vehicles.

Only time will tell if Tesla’s fundamentals can catch up to justify its value. In a world focusing more on sustainable forms of transport and energy production, Tesla’s lead in the electrical vehicle race and strong shareholder following could be enough for it to go on and meet its high expectations.

Written by Sam Chedzoy & Jonty Brooks

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