As of this date 11-27-20 Tesla has been a visible flyer with respect to current price. It currently trades at 19x its price to sales. With so much controversy around the current price of the stock I thought I would use a simple metric to put this into perspective, so I ran some simple numbers and a scan. Keep in mind this doesn’t go into business lines, strategies, or outlooks that would take much more time than I want to spend on this topic.
First, to understand the p/s multiple in its simplest form. If you were looking to purchase a pizza store with annual sales of $1M a p/s multiple of 20x would put the purchase price of the store at $20M. Seems crazy right? Not so fast. My example of a pizza store is not realistic because it’s not a liquid investment. In other words you can’t wake up tomorrow and just decide to sell or purchase a pizza store on your computer as you can with a publicly traded company. Hence, public companies enjoy greater multiples in most metrics due to their liquidity.
To test TSLA’s current p/s multiple versus other high flyers I ran a scan to see which other stocks came up with a p/s at or above it’s 19x multiple on Equities Lab. Excluding biotech, financial services, and ADRs at closing prices above $10 my list came up with over 60 companies with multiples above 19x. Most are names many would recognize such as NVDA, TWLO, NOW, RNG, and TDOC.
Tesla’s Simple P/S
Tesla’s 2019 revenue (in millions) was $24,578. Its current market cap is about $555 billion. If you average the last ten years in revenue growth throwing out the high and low you arrive at a factor of about 62%. If we grow the 2019 revenue by 62% per year forward we arrive at the $555 billion multiple between year six and seven. Now let’s compare it against RNG.
RNG’s 2019 revenue (in millions) was $903. Its current market cap is about $26 billion. Using the same formula as above we arrive at a factor of 36%. Growing the revenue forward by the factor we get to the market cap between years eleven and twelve. A longer time frame than TSLA.
Keep in mind RingCentral has a different business model that’s main driver is their recurring monthly subscription revenue versus Tesla’s larger ticket items. Also, changing communications providers often creates a narrow switching moat to contend with. Ring’s multi-year growth has been more consistent and measurable whereas Tesla’s has a few years with revenue swings.
There are many factors and multiple methods of putting a value to a growing business. For businesses that don’t make a profit analyst’s factor forward and base their estimates on projected returns to arrive at inflection points of when the company will turn profitable and how much potential cash will start flowing to the owners. The key word here is estimate meaning the business has to hit the projections or watch out. Wall Street has no sympathy. Darlings can become dogs quickly.
So what does an investor do? I heard a great quote the other day regarding this market from a hedge fund manager. In his opinion there are only two positions currently, “long and longer.” Maybe he’s right, maybe not. When you buy based on a realistic value and understand your potential downside risks then you won’t care about what the market thinks, since you know at some point you will arrive at the value even if it’s only pizza that you are interested in.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.