Here’s why the P/E ratio of Tesla stock looks ridiculous

At first glance, the valuation of Tesla stock defies all sense. It trades at 242 times earnings. One way of looking at it: budding investors are paying $242 for each $1 of yearly profits.

The price-to-earnings (P/E) ratio of other car companies like Hyundai (5.6) and Volkswagen (5.7) are light years from that figure. The FTSE 100 average is 19. The S&P 500 average is 31. Even tech stocks, which command a huge premium because they are seen as the future, aren’t nearly as high. Amazon has a P/E ratio of 34, Nvidia of 57!

I don’t think it’s stretching it to call the Tesla valuation ridiculous (on the surface at least). The question to answer then: why is it trading at such high multiples? What do investors find attractive in the company?

Various parts

The best explanation for Tesla’s sky-high valuation may come from the company itself. That’s when the CEO (the ever-polarising Elon Musk) spoke of “the dozen or so startups that constitute Tesla”.

What does he mean by this? Well, startups are usually high growth and low earnings. The idea is to hit a ‘moonshot’ of a business and potentially revolutionise whole sectors.

Tesla’s self-driving segment is one example of this. The firm’s robotaxis are one of only two (along with Alphabet‘s Waymo) that are already taking rides from passengers. These are being rolled out as we speak â some driverless taxis are headed for London soonish. It’s been called a “trillion dollar industry”.

Then there’s the Optimus humanoid robots. At least a dozen companies around the world are trying to crack the code on programmable ‘human replacements’. The productivity gains could be huge if Tesla or any other firm can create androids that can stack shelves or do other mundane tasks.

Tesla also has operations in artificial intelligence, battery storage, solar power, charging infrastructure, and manufacturing innovations. Oh, yes, it sells a lot of electric cars too.

A buy?

Of course, startups are risky. Overturning industries is hard. Lots of them fail. If Tesla can’t turn these bright ideas into real earnings, then this might look like a poor investment sometime down the road.

Another cause for concern is the firm’s erratic owner. Musk seems to get embroiled in all manner of things these days, from buying social media websites to helping presidents to predicting civil wars. Worries about his focus being directed elsewhere may be justified.

For my part, I have a position in Tesla shares. Looking at the good as well as the bad, I think Musk brings a ‘cool factor’ to the company. The world’s best and brightest want to work on changing the world at his companies. It’s partly why his firm stole a march in electric vehicles, why SpaceX has superseded NASA, and why Tesla shares might even justify that ridiculous valuation. I think it’s one to consider.

The post Here’s why the P/E ratio of Tesla stock looks ridiculous appeared first on The Motley Fool UK.

Should you invest Â£1,000 in Tesla right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Tesla made the list?

See The Six Stocks

More reading

John Fieldsend has positions in Tesla. The Motley Fool UK has recommended Alphabet, Amazon, Nvidia, and Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.