Valuing a company involves a significant amount of estimations, centred around what will future cash flows be. Key questions include: Will the company be able to significantly grow its sales? What future costs should we anticipate? Does the company possess durable competitive advantages that can sustain its cash flow over time? Ultimately, investors must decide what they’re willing to pay today for the possibility of future earnings.
Tesla presents a particularly challenging case for valuation. The company currently trades at a price-to-earnings (P/E) ratio of around 182. This means that, at its current earnings level, it would take 182 years for an investor to recoup their investment through profits alone—a figure that underscores what some people in the market think is fair value for the company.
Typically, a high P/E ratio suggests rapid sales growth. Tesla’s core business is the manufacturing and sale electric vehicles (EVs), but recent data shows a troubling trend. EV sales for Tesla have declined for two consecutive quarters. In its most recent quarter, Tesla delivered 384,112 vehicles—down 13% compared to the same period last year. In Europe and the UK, deliveries fell to 13,863 vehicles, a 28% year-over-year drop. This marks the fifth straight quarter of declining sales.
This weakness can largely be attributed to two factors:
- Intensifying competition from both legacy automakers and newer EV manufacturers entering markets where Tesla once had a dominant presence.
- Elon Musk’s increasingly polarizing public persona, which has been alienating many consumers and investors.
Tesla is betting that its next major growth opportunity is autonomous vehicles. The company has begun testing its robotaxi service in Austin, Texas, with a limited number of vehicles—each currently accompanied by a Tesla employee in the passenger seat for safety. For this initiative to scale and become profitable, Tesla would need to prove that their vehicles are safe to both potential passengers and regulators soon. Tesla also needs the proceeds from its EV business to be able to scale the robotaxi division. This can be extremely difficult when sales for the EV division are falling.
Tesla has a history of defying expectations and overcoming adversity. Can they do it again?
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