Tesla’s valuation is turning heads: Chart of the Week

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If the fact that Tesla bulls have a religious commitment to the stock isn’t clear on social media, it certainly is in their finances.

Tesla’s forward price-to-earnings ratio, which divides next year’s estimated earnings per share by the current share price, is 97.1x, according to data from Yahoo Finance.

Our Chart of the Week compares this number to its peers and it is impressive.

While Nvidia received most of the valuation attention during this year’s bull run, Tesla’s valuation has investors paying nearly double: Nvidia’s forward P/E is around 48.5x. And while Nvidia shares have risen 800% since 2023 and nearly 200% so far this year, its earnings have also exploded.

The rest of Tesla and Nvidia’s Magnificent peers are all trading at valuations above the S&P 500 average of around 22x. Once again, these companies have been the source of most of the market’s earnings growth in recent quarters.

But there is always more to the story in the markets.

In a note this week, DataTrek’s Nicholas Colas wrote about how these numbers, while useful, can be broken down further by looking at how much of a stock’s valuation comes from current earnings and how much comes from what is essentially an analytical version of expectations. and dreams.

Colas calculates that about 45% of the valuation of the S&P 500 as a whole comes from current earnings, with the rest coming from historically supported optimism that earnings will continue to grow.

And if Tesla is simply more expensive than its Mag Seven peers, it’s in a different stratosphere compared to its automaker peers, with GM and Ford trading at 5.1x and 6.5x next year’s earnings. year, respectively. The legacy automakers’ discount to the market is due to concerns about how well they would fare in a recession.

“And then we come to Tesla, where 91% of its valuation is based on future earnings growth,” Colas wrote. “This tells us that this is a faith-based action, not an action whose valuation is based on short-term fundamentals.”

With future earnings expectations so high, it’s obvious that investors are banking on its robotaxi thesis as a paradigm shift for the company – and probably not the only change to come.

But it would also be wise to be careful when it comes to reviews.

The caveats that accompany pronouncements about what is over- and undervalued often don’t really matter. On the whole, valuation norms are more likely to be maintained over time: the S&P 500’s average forward P/E is about 19x. Specifically, the range of results is much wider.

The story continues

All-time highs often follow all-time highs, and history is full of losses and missed gains from investors who made too much of a company being “overvalued” by the books – and were crushed by inertia and sentiment.

Especially for a Tesla.

Ethan Wolff-Mann is a senior editor at Yahoo Finance and runs newsletters. Follow him on Twitter @ewolffmann.

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