Tesla stock ($TSLA) has been on a tear since the results of the 2024 election became clear. After closing just over $251 on Tuesday, November 5, the stock rose 27.8% by end of week to just over $321, putting $TSLA over a $1 trillion market cap for the first time since April 2022. While political outcomes and their implications clearly can have some degree of market power over a stock, such a forceful upswing begs the questions: What is a fair valuation for Tesla? Is it too late to buy? Is it a good time to sell?

While the stock market and individual stocks are susceptible to short-term volatility – and businesses each have unique factors that should be considered – an array of techniques exist which financial advisors and analysts may use to provide some context to a stock’s price at any given time. 

Below we’ll apply Tesla’s current numbers to some of these valuation techniques. While these metrics are not foolproof, they can help hopeful investors understand the stock relative to financial statements and comparable businesses. For a professional, comprehensive evaluation of whether Tesla is a buy or sell based on your own financial goals, you can use this free tool to match with a fiduciary financial advisor.

Tesla’s PE Ratio

Tesla’s PE ratio as of November 8: 87.77

A company’s PE ratio is one of the most basic valuation metrics and a good jumping-off point for measuring the price of a company’s stock relative to other companies. “PE” stands for “Price-to-earnings”, and compares the current stock price to the company’s earnings per outstanding share of stock.

For a general assessment of whether a company may be over- or undervalued based on its PE ratio, it is generally compared to the average PE ratio in its industry. Tesla is categorized in the “Consumer Cyclical” category. Compared to other companies in this category, Tesla currently has a high PE ratio. World PE Ratio puts the average Consumer Cyclical company PE ratio at 25.87 as of November 8, 2024. Ultimately, the higher the PE ratio, the more short- to medium-term growth is being priced in by investors.

Some analysts and investors, including Tesla CEO Elon Musk, have argued that Tesla belongs in the “Tech” category, where PE ratios tend to be higher. For example, some large tech companies in the “Technology Companies” chart can be seen as having current PE ratios as high as 149. According to World PE Ratio, the average PE ratio for tech companies stands at 37.15.

Accounting for Earnings Growth

Tesla’s estimated 12-month Forward PE: 96.15

Tesla’s estimated 5-year PEG ratio: 9.16

In cases of high-expected growth, as it would seem investors are pricing in in Tesla’s case, a Forward PE ratio can also be used for more insight. This uses estimates of the company’s earnings at a certain point in the future – usually 12 months – generally based on guidance statements made during company earnings calls. Yahoo Finance has Tesla’s current Forward PE ratio at 96.15, but this metric may vary depending on the analyst’s assumptions about future earnings. Just like the PE ratio, the Forward PE is a relative metric that may be compared to companies with common characteristics.

Similarly, the Price-to-earnings-growth, or PEG, ratio, can also be used for companies with high expected growth. This divides the PE ratio by the expected rate of earnings growth. Yahoo Finance currently has the PEG ratio at 9.16 with a five-year outlook, but this ratio may also vary depending on analyst expectations for earnings and timeline. Comparing Tesla’s PEG ratio to that of similar companies may require more extensive due diligence on the investor or financial advisor’s part as it requires assumptions about the growth rate of Tesla as well as other companies. In general, a lower PEG ratio indicates the potential for higher returns than companies with higher PEG ratios.

A financial advisor can help you apply earnings guidance and other context to determine an appropriate entry or sell point for Tesla or other potential investments. 

Tesla Trading Volume, Volatility and More

Depending on a stock’s characteristics and your intended investment goals and timelines, a plethora of other metrics may be used for additional analysis.

Trading Volume 

Tesla’s 65-day average: 82.25 million

Tesla’s November 8 trading volume: 204.78 million

For instance, trading volume data is available on a daily basis. This indicates the volume of shares being traded and can indicate the relative demand and risk tolerance of other investors on a given day. Higher volume indicates stronger demand. Pre-market and after-hours trading, for instance, generally have lower trading volume and thus the price action may be more volatile versus market hours when more investors may be buying and selling.

Trading volume should be compared to a stock’s average trading volume, rather than that of other companies, as its impact is dependent on the number of shares in circulation.  

According to Barron’s, the 65-day average for Tesla’s trading volume currently sits at 82.25 million shares exchanged. For comparison, the trading volume on Friday, November 8, was about 2.5 times that at 204.78 million, indicating exceptionally strong demand when combined with the upward price movement.

Beta

Tesla’s beta: 2.33

Beta is a measure of a stock’s volatility in relation to the overall market. A stock’s beta reflects how much a stock may be expected to move relative to the wider market’s movements. A beta of 1 indicates that its price tends to move with in tandem with the market. If beta is greater than 1, it suggests that the stock is more volatile than the market; the stock is expected to amplify the market’s movements. Conversely, a beta less than 1 indicates less volatility compared to the market, suggesting a stock might rise or fall more gently than wider market fluctuations.

Tesla is a particularly volatile stock, with Reuters reporting beta at 2.33. This indicates that if, say, the S&P 500 was to go up or down 1% on a given day, movement in $TSLA might go so far as -2.33% to 2.33%, just due to general market volatility (of course, other factors may also come into play, expanding that potential range.)

Understanding Tesla’s high beta is useful for investors looking to assess risk. High beta could appeal to investors seeking aggressive growth or trading options, who are comfortable with higher risk, but it might deter those with a conservative approach, particularly if their investment strategy is focused on stability during market downturns. 

More Metrics to Consider

There are numerous other ways investors can get perspective on stocks like Tesla. For example:

• The Price-to-Sales (PS) ratio compares a company’s stock price to its revenue, offering insight into how much the market values every dollar of a company’s sales. 
• The Price-to-Free-Cash-Flow (P/FCF) ratio looks at the stock price relative to the cash a company generates after accounting for capital expenditures, which can be particularly telling for a firm like Tesla with significant reinvestments. 
• The Discounted Earnings Model projects future earnings and discounts them back to the present value, which may be useful for understanding long-term growth potential under different scenarios. 
• Technical analysis, as opposed to fundamental analysis, focuses on patterns in stock price movements and trading volumes, independent of the company’s financials, to predict future price movements.

Each method provides a different lens through which to view investment potential, catering to diverse investor strategies and risk profiles. A financial advisor can help you get a holistic view of potential investments like Tesla. Match with a financial advisor today.

Limitations on Fundamental and Technical Analysis

Fundamental and technical analysis techniques – while often helpful for context – come with their own sets of limitations. These valuation techniques are inherently backward-looking, relying on historical data which might not account for rapid shifts in technology, consumer preferences or management strategies. For instance, Tesla’s advancements in electric vehicle technology or autonomous driving might not be fully quantified by traditional financial metrics, highlighting the importance of qualitative factors. Listening to earnings calls, understanding the competitive landscape and grasping the strategic direction of a company can also provide additional critical insights.

Moreover, external factors beyond a company’s control can significantly sway its stock performance. Speculation can drive volatility, particularly through options markets. Market sentiment, news, macroeconomic trends and unforeseen events can lead to discrepancies between a stock’s fundamental value and its market price. Political climates and international relations may impact supply chains, trade and regulation, all potentially impacting Tesla’s bottom line.

Your personal risk tolerance and overall investment goals are also important to consider. A high PE ratio might indicate growth potential, appealing to some investors, but could be seen as overly speculative by others with different risk appetites. Highly volatile stocks may not be appropriate for all investors, as there may be sudden swings in either direction in these cases.

Thus, while such analysis can be invaluable, it should be employed alongside other analytical tools, market knowledge, and an understanding of one’s investment horizon and goals to establish an appropriate investment thesis.

Consider matching with a fiduciary financial advisor if you are interested in gaining professional insight on Tesla or other potential investments.

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