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What is Tesla worth? [1]
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Date: 2025-03-30
It’s not breaking news that Tesla's stock is experiencing a sharp decline (-55% from the peak in mid Dec). But according to my simple analysis it is still significantly overvalued - it is possible that a rapid unscheduled disassembly lies ahead.
It is my non-professional belief that it should be valued at 15%-25% of where it stands today. This post is not investment advice, it just shows how I think about valuation for my own use. It is also not a slag on Tesla vehicles, I have many friends who have loved their Teslas for years. Tesla is opening their charging network to all comers (yay!) and are doing interesting work on home battery storage. It is an interesting company doing important things. But I don’t think it is rationally valued.
There are many ways to value stocks but I'm going to use the simplest one I know - one that every careful investor should have in their toolkit - the Price/Earnings ratio. P/E is the market value of the all the stock divided by the annual profits. In crude terms, you can think of it as the number of years it would take to pay back the value the market is assigning to the stock (it doesn't really work that way, but it helps to conceptualize it).
Let's use the fictional Worldwide Tinfoil Foundry Inc. (sticker symbol WTF) to demonstrate the math. There are 1 million WTF shares outstanding. The stock is currently at $600 for a market cap of $600m. Last year WTF generated $100 million in profits. The P/E is the $600m market cap/$100m in profits, or $600,000,000/$100,000,0000 =6. We'll come back to that number later.
Tesla's current P/E, after the huge drop, is 129. Hold that thought too. Any stock holding that kind of P/E ratio has to have a massive growth trajectory ahead of it. An organization’s current performance can't justify that kind of PE, it is a big bet on the future.
Usually, you will find similar companies' P/E clustering in a range, with better performers valued higher than laggards. The better performers often have a story about future growth that bumps their shares up. Industries tend to cluster in these ranges because they share similar risk profiles, investment requirements, and market volatility (some of the major factors in valuation). This industry clustering is what I'll use to make my point.
Tesla-stans will tell you that the stock isn't valued as a car company, its valued as a tech company. "Don't look at the P/E of automobile manufacturers, Tesla is nothing like them." This isn't completely unreasonable; Chinese EV makers tend to be valued more like tech companies. But when it comes to Tesla that is utter bullshit. Tesla is wildly and extravagantly overvalued EVEN IF it is a tech company.
Let's go to the real world to see why. To start let’s look at the major tech companies.
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