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

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

This is The Takeaway from today’s Morning Brief, which you can sign up to receive in your inbox every morning along with:

If the fact that Tesla bulls have a religious-like commitment to the stock isn’t clear from social media, it sure is from its financials.

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 Yahoo Finance data.

Our Chart of the Week compares this figure to its peers, and it’s striking.

Though Nvidia has gotten most of the valuation attention during this year’s bull run, Tesla’s valuation has investors paying almost double: Nvidia’s forward P/E stands around 48.5x. And though Nvidia’s stock is up 800% since 2023 and nearly 200% so far this year, its earnings have exploded too.

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

But there’s always more to the story in 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 present earnings and how much comes from what is essentially an analytics version of hopes and dreams.

Colas calculates that around 45% of the valuation of the S&P 500 as a whole comes from current earnings, with the rest coming from the historically backed 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, respectively. The legacy automakers’ discount to the market is due to concerns about how well they’d fare in a downturn.

“And then we get to Tesla, where 91% of its valuation is based on future earnings growth,” Colas wrote. “That tells us this is a ******-based stock rather than one whose valuation is grounded in near-term fundamentals.”

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

But we’d also be wise to use care when it comes to valuations.

Caveats that accompany pronouncements about what’s over- and undervalued often don’t really matter. In the aggregate, valuation norms are more likely to hold over time: The S&P 500’s average forward P/E is around 19x. In the specific, the range of outcomes is much wider.

Story continues

All-time highs often follow all-time highs, and history is littered with both the losses and missed gains of investors who placed too much weight on whether a company was “overvalued” by the book — and got steamrolled by inertia and sentiment.

Especially by a Tesla.

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