Investment Selection – Tesla Stock

Introduction

Stock price ratios are critical metrics financial analysts and investors use to assess the
financial performance of publicly traded firms and their stock. These ratios offer valuable
insights into an organization’s financial health, growth potential, and profitability. Investors can
use these metrics to quickly scan a company’s financial health and stock, allowing them to make
informed investment decisions and establish if stocks are overvalued or undervalued relative to
their competitors in the industry. This paper analyzes Tesla’s stock performance to develop its
financial health, profitability, and potential future growth to demonstrate why investing in the
company is a good idea. It also uses other financial metrics (price-to-earnings and price-to-cash
flow from operation) and systematic and potential returns to demonstrate why Tesla is a viable
investment option.

Analysis of the Company – Tesla

Tesla, Inc. is an American-owned automotive conglomerate that manufactures and sells
clean energy vehicles (electric trucks and cars), storage batteries, solar roof tiles, solar panels,
and other related services and products. Tesla is the globe’s most valuable automaker, controlling
18% of the electric vehicle (EV) market. Over the past ten years, the company’s stock has
skyrocketed from roughly $1.85 in 2011 to about $160.9 in 2023 (Macrotrends, n.d.).

Tesla Stock Price Performance

1. Tesla’s Stoke Prices
   Tesla’s stock prices have grown exponentially since 2019, hitting a high of $409.97 on 11
   April 2021 at the height of the COVID-19 pandemic. This represents a more than 20,000%
   growth from the 2010 value of $2.006. However, since 11 April 2021, Tesla’s stock depreciated

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significantly, hitting $108.1 on 3 January 2023, the lowest since 13 April 2020. However, the
prices rose slightly in February, up to $208.31 on 17 February, the highest in 2023. Since then,
Tesla’s stock has fallen significantly, recording $153.75 on 26 April 2023.

Graph 1. Tesla’s stock prices are between 1 July and 26 April 2023 (Macrotrends, n.d.).
Despite experiencing mixed results, Tesla’s stock remains the highest in the EV market,
holding an 18% market share. This perhaps explains why Tesla is the most viable diversification
option. For example, on 28 April 2023, Tesla’s stock ($164.31) ranked the highest, compared to
Rivian Automobiles or RIVN ($12.82), Lucid Group or LCID ($7.94), General Motors or GM
($33.04), and Ford Motor or F ($11.88) (Tip Ranks, n.d.), besides recording the highest stock
prices. Although Tesla’s stock price has dropped significantly by 212.42% between 29 April
2020 and 27 April 2023, while other companies have gained within the same period, Tesla’s
stock remains the strongest.

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Graph 2. Tesla’s stock performance between 29 April 2020 and 27 April 2023, compared to
General Motors, Ford Motors, Lucid Air, and Rivian (Tip Ranks, n.d.)
Other Evidence to Support Tesla’s Strong Stock Performance
Although Tesla’s stock prices have been dropping significantly within the past 3-5 years,
other financial stock ratios – price-to-earnings (P/E), price-to-book (P/B), price-to-cash-flow-
from-operation (P/CFO), and price-to-dividend (P/D) – show that the company is outperforming
its competitors in the EV market. The following section explores Tesla’s P/E, P/B, P/CFO, and
P/D ratios, compares them with its competitors, and explains their meaning for investors.

2. Price to Earnings (P/E) Ratio
   A price-to-earnings (P/E) ratio is a metric that compares a firm’s share price to its yearly
   net profits. Financial analysts or investors can use this metric to compare the performance of
   companies within a similar industry of the exact sizes to determine which is a better investment.
   For example, Tesla’s average P/E between 31 December 2021 and 31 December 2022 (twelve
   months) is 44.2. This is significantly higher than its main rivals like Ford Motor Company (-
   24.0), Rivian Automotive, Inc. (-1.8), General Motors (4.9), Nikola Corporation (-0.8), and
   Phoenix Motors (-1.2). Tesla’s median P/E from December 2018 to 2022 was 34.8.

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Graph 3. Tesla’s P/E between 31 December 2021 and 31 December 2022 (Finbox, n.d.).

3. Price to Book (P/B) Ratio
   Besides the price-to-earnings ratio, the price-to-book (P/B) ratio can provide critical
   insight into a company’s assets. P/B refers to the ratio of the market value of a firm’s share (stock
   price) to its equity book value (or the value of its assets expressed on the balance sheet). Tesla’s
   P/B as of 27 April 2023 is 10.40, representing a significant drop from a high of 35.21 on 31
   December 2021 and 22.60 on 31 March 2022 (Yahoo Finance, n.d.; Macrotrends, n.d.). Tesla’s
   twelve-month (between 31 December 2021 and 31 December 2022) P/B is also significantly
   higher than the P/B for General Motors (0.7), Rivian Automotive (0.9), Phoenix Motor Inc. (1.2),
   and Nikola Corporation (1.2) (Finbox, 2023a).

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Graph 4. Tesla’s P/B between 31 March 2019 and 28 April 2023 (Finbox, 2023)
Systematic Risk and Potential Returns Associated with Tesla’s Stock
According to Global Data (n.d.), Tesla’s operational risk is 2.43, below the industry’s
average. The firm’s established market position allows it to meet consumers’ demands while
securing benefits from zero-emission automobile adaption trends. But a smaller operations scale
than other car manufacturers, coupled with an average profile per car and low EBIT, negatively
affects the operational efficiency, profitability, and scale pillars (Global Data, n.d.). Tesla’s mean
financial risk score is 2.61, powered by its healthy cash flow and liquidity ratios. However, a
high debt on the balance sheet and low EBIT margins impact Tesla’s leverage and interest
coverage ratios, increasing its overall financial risk profile.

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Graph 5. Tesla’s financial risk pillars (Global Data, n.d.)
Despite these setbacks, investing in Tesla seems a good idea because of its potential
benefits. Tesla’s 2022 revenue amounted to over $81.5 billion, representing a 51% jump from the
2021 revenue of $53.82 billion (Carlier, 2023). Over $71 billion of these revenues come from the
company’s automotive segment, including Tesla Model Y, 3, X, and S. The company’s average
ROE (return on equity) for financial years ending Dec 2018, and 2022 was 4.6%. The company
had an ROE of 28.7% between 31 Dec 2021 and 31 Dec 2022, compared with 14.1% for General
Motors, -40% for Rivian Automotive, Inc., -4.3% for Ford Motor Company (Finbox, 2023b).
Similarly, Tesla’s return on investment (ROI) skyrocketed in December 2022 at 25.3%, compared
to General Motors’s 5.2%, Rivian’s -39.64%, and Ford Motor’s 4.83% (CSI Market, n.d.). ROI
and ROE are two essential performance metrics used to calculate a company’s earnings by
dividing profits returned on an investment by the cost of an asset (ROI) and net income by
shareholder’s equity (ROE). Tesla’s higher ROE and ROI mean it converts its equity financing

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into profits better than its competitors and operates more efficiently. With the company expected
to launch the mass production and delivery of its Cybertruck and increase its vehicle delivery to
1.8 million in 2023, experts project the company’s stock prices to hit $250 and $350 by the end
of the 2023 and 2024 fiscal years (Coin Price Forecast, 2023).
Conclusion

Tesla is undoubtedly one of the world’s best-performing companies. Its stock prices,
price-to-earnings ratio, and price-to-book ratio outperform its main competitors in the EV and
general automobile industries, including General Motors, Lucid, and Rivian. With new projects
set to be launched in 2023 and 2024, such as mass-production and delivery of the Cybertruck and
semi-truck, Tesla’s stock prices, ROE, and ROI are expected to hit a new high it is a more viable
investment option than other automobile players. However, the company must address its current
2.41 operational risk to hit these new heights.

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References
Carlier, M. (2023, Mar 17). Tesla’s revenue 2008-2022. Statista.
https://www.statista.com/statistics/272120/revenue-of-tesla
Coin Price Forecast. (2023). Tesla stock forecast 2023 – 2025 – 2030.
https://coinpriceforecast.com/tesla#:~:text=Tesla%20stock%20price%20stood%20at,2032%20an
d%20%241100%20in%202034.
CSI Market. (n.d.). General Motors financial company, Inc. https://csimarket.com/stocks/GM-
Return-on-Investment-ROI.html
Global Data. (n.d.). Tesla Inc – risk profile. https://www.globaldata.com/data-
insights/automotive/tesla-inc-risk-profile
Finbox. (2023a). Tesla, Inc. https://finbox.com/NASDAQGS:TSLA/charts
Finbox. (2023b). Tesla, Inc
https://finbox.com/NASDAQGS:TSLA/explorer/roe/#:~:text=Analysis&text=Tesla’s%20return
%20on%20common%20equity,in%20December%202022%20at%2033.6%25.
Finbox. (n.d.). P/E ratio for Tesla, Inc. https://finbox.com/NASDAQGS:TSLA/explorer/pe_ltm/
Macrotrends. (n.d.) Tesla price-to-book ratio 2010-2023/TSLA.
https://www.macrotrends.net/stocks/charts/TSLA/tesla/stock-price-history
Tip Ranks. (n.d.). Tesla (TSLA) – similar stocks. https://www.tipranks.com/stocks/tsla/similar-
stocks
Yahoo Finance. (n.d.). Tesla, Inc. (TSLA). https://finance.yahoo.com/quote/TSLA/key-statistics/