Answer to Question #227579 in Finance for star

Question

In January 2021, Tesla Inc shares were priced at $860. The value of the company at

that stock price was $810 billion. The reported price earnings ratio TTM (Trailing

Twelve Month) ratio in the Financial Times at that date was 1,693. At the same date,

Volkswagen (VW) was worth €89 billion and had P/E (TTM) of 18.

In January 2021, 15 of the 25 investment analysts following Tesla had buy or hold

ratings on the stock and 10 had sell.

In finance terms, how can you justify Tesla’s stock price? It is a growth stock, but

how can you pay that price for growth?

Answer 1

Solution:

In finance terms, Tesla’s stock price is highly rated by most of the analysts who rate it positively. As such, Tesla’s stock is a growth stock, which means it is anticipated to grow at a rate significantly above the average growth for the industry or market and has the potential to grow rapidly than the overall economy. Its market share price is extremely high and it has a higher price earning ratio, which indicates how valuable the stock is.

 

Investors invest in growth stocks when they anticipate that they will earn more funds through capital gains when they eventually sell their shares in the future if the stock’s value increases. Investors remain willing to invest even at a higher P/E ratio since they expect the company to grow quickly. Similarly, the current stock price may look cheap several years down the road making them gain significantly.