tesla rewrite -- 725 words (excluding reference)

This paper will discuss the stock valuation and analysis of the common stock of Tesla, Inc. It will describe the relationship between the value of Tesla stock as it relates to their price to earnings ratio. The paper will also discuss the importance of Market Capitalization and Beta and what information it can provide for their investors. And lastly, through this analysis, a recommendation will be made whether to invest in Tesla, Inc. based on the information that obtained through the Yahoo Finance website. (See appendix for stock analysis data)

Tesla Inc., - Background

Although many may look at Tesla, Inc., as an alternative fuel automotive company which has recently surpassed Ford as the second highest market valued American automotive company with a market cap of $50 billion. Tesla's mission statements state that their mission is to accelerate the word's transition to sustainable energy.

Stock Valuation – Price to Earnings Ratio

A company’s price to earnings ratio is affected by three factors. These following factors are 1) investment opportunities on future projects, 2) small risks stocks have higher PE ratios, 3) conservative accounting practices will likely have high PE ratios. Stock valuation may be affected by one but not all of the factors. In the case of Tesla, PE ratio may be high based on investment opportunities on future projects that can affect stock pricing. As a technology company in alternative energy, it is not uncommon to see that their share prices have been inflated based on the perspective of a launch of a new product or service.

“Dreman (1994) analyzed stock returns of 1200 US stocks for 20 years which according to him is sufficient period for investment. He found that stocks with a low P/E ratio outperformed stocks with a high P/E ratio at the end of his study period. He warned that investors should be patient and should stay for long-term if they want to be benefited by the low P/E strategy." (Mayur, 2015) This analysis is about long-term investors; short-term investors may see things a little different, as high risk tend to have higher short-term returns.

Market Capitalization and Beta

“The market capitalization of a public firm is equal to the firm’s stock market price per share multiplied by the number of share outstanding.” (Ross et al., 2016, p. 57) It allows investors to get a better understanding of the relative size of a company versus another and what the company is worth in an open market. Ultimately, it reflects the value of what an investor is willing to pay for the stock. "Beta is one of the most important measures of equity market volatility. Beta can be through of as asset elasticity or sensitivity to market. In other words, it is a number that shows the relationship of the financial instrument to the financial market in which this instrument is traded." (Macoaxis, 2017) When the value of beta is greater than one, that means the asset of the company is volatile and tends to move with the trends of the market. In the case of Tesla, it currently has a beta of 1.15 and a market cap of $50.29 billion.

Recommendation

In conclusion, based on the stock valuation and analysis of Tesla Inc. stock, my recommendation is to hold off on investing into Tesla, as its stock is at its peak value. Analysts have a target price of $258.94 which is about $50 per share lower than the current stock price. Although there is a lot of upside to the stock, the current stock price is currently overvalued due to their new Model 3 launch at the end of the 4th quarter of 2017. Tesla will encounter a lot of challenges in the upcoming years as new products tend to have issues at launch and as competition stiffens with other automotive entering the electric car market. After all the dust has settled, Tesla may be worth investing in 2018.

Appendix

References

Dreman, D. (1994). Emotion versus logic. Forbes, 7, 351.

Macroaxis, (2017). Yahoo Beta vs. Market Capitalization. Retrieved from:

https://www.macroaxis.com/invest/ratioCompare/YHOO--Beta--Market-Capitalization

Mayur, M. (2015). Relationship between Price-Earnings Ratios and Stock Value in an Emerging

Market, Paradigm (Ghaziabad, India), ISSN: 0971-8907, Vol. 19, Issue 1, pp.52-64

Ross, S., Westerfield, R., Jaffe, J., & Jordan, B. (2016). Corporate Finance (11th). New York,

NY: McGraw-Hill, Ch. 3, p. 57