In a tough year for the global auto industry, with new car demand and travel dropping sharply, Tesla stood out as a bright spot by becoming the world’s most valuable carmaker, surpassing giants like Toyota, GM, and Volkswagen. Tesla’s stock price skyrocketed so fast that CEO Elon Musk briefly became the richest person on the planet just days ago.
But beyond market cap, Tesla’s stock shocks with another key figure: its Price-to-Earnings ratio (P/E). This ratio shows how long investors would have to wait to break even on their shares if profits stay steady. In other words, it’s the number of years Tesla needs to earn enough to match its current market value.
For Tesla, analysts estimate the P/E ratio at a staggering 1,674.2. That means if Tesla’s annual profits don’t grow, it would take over 1,600 years for the company to earn back its current market value.
Put simply, if you buy Tesla stock hoping for dividends to cover your investment, you’d be waiting more than 1,600 years to break even at Tesla’s current profit levels.
This isn’t surprising when you look at Tesla’s recent earnings. In Q3 2020 (June to September), Tesla made $8.8 billion in revenue, up 39% from the previous year. Net profit more than doubled year-over-year but was still just $331 million, about 3% of total revenue. While not hugely impressive, this was Tesla’s best quarterly performance in years.
This explains why analysts say it could take thousands of years to recoup an investment in Tesla stock.
So why is Tesla’s stock price so high despite modest profits? The stock price doesn’t just reflect current earnings, it reflects buyers’ expectations for the company’s future.
Although Tesla produced just under 500,000 cars in 2020, far less than traditional automakers, its revenue and profit growth rates are in the double digits, something legacy carmakers can’t match. As Tesla leads the global electric vehicle market, investors are betting big on its future.
Another factor driving Tesla’s wild stock surge is the rise of online trading apps. During the pandemic, these apps made it easy for users to open accounts and trade stocks from home.
Tesla is one of the most popular stocks on these platforms. Elon Musk’s fame, young investors’ love for a tech-forward car brand, and the ease of trading have all helped Tesla’s stock shoot up like a rocket since the pandemic began.
For many, buying Tesla stock feels like a gamble, even Elon Musk himself admitted the price was too high. Mid-year, Musk tweeted that Tesla shares were overvalued, wiping $14 billion off the company’s market cap. But the stock quickly bounced back and even climbed higher.
Source: Jalopnik
