Answer to Question #227594 in Finance for Vincent Ogechi

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

TESLA INC.

P/E ratio (TTM) = 1.693 (given)

Share price of Tesla = $860

We know P/E= Market price of share / EPS

EPS = Market price of share ÷ P/E

EPS= $860 ÷1.693

EPS= $507.97

In order to carry out detailed analysis, additional informations like growth in EBIDTA, PAT, sales revenue,dividend pay out ratio, industry P/E, etc are required. But all these information is missing.

So, the entire analysis is based on P/E and EPS.

It is a growth stock as is evident that 15 out of 25 investment analyst had buy or hold rating on the stock i.e., 60% of analyst had positive view on Tesla Inc.

As we know that P/E ratio is used for valuing a company's stock price.

High P/E ratio indicates company's company's share price is over-valued or the investors are expecting high growth rates in future.

On the other hand, low P/E ratio indicates that the stock price is under-valued.

Investors are usually attracted towards a high growth company having low P/E ratio as the stock is worth buying at current price.

Volkswagen (VW):

P/E ratio (TTM) is 18

It means an investor is paying 18 times the profit per share to purchase the stock.

Comparison:

P/E ratio of Tesla is 1.693 whereas P/E ratio of Volkswagen (VW) is 18.

Industry P/E ratio would have helped us to understand the market's expectation on growth from the industry.

Industry P/E data is missing

 

Conclusion: Given the P/E ratio, the price of Tesla Inc., can be justified on the ground that if in the future, the market values it to be more than its current P/E ratio.