Tesla May Trade Like a Falling Knife, But its P/E Multiple Is Still Much Higher than Competitors

Tesla shares are trading like a falling knife right now, which may scare some investors. However, its P/E multiple is much higher than its competitors.

Tesla shares are down 68% year-to-date and 43% in December 2022 alone. In addition, they continue to be in the spotlight due to their dramatic price performance and valuation—and their implications for future stock market performance and valuation. Among other things, the share price reflects investors' fears about Elon Musk's purchase of Twitter and his sale of Tesla shares to finance it. Concerns have also emerged about lower production numbers, especially in China, due to the suspension of production lines in the last week of December, and during the Chinese New Year holidays. One of the concerns was also the shrinking Price-to-Earnings (P/E) ratios that investors now attach to growth stocks due to central banks’ relentless monetary tightening actions.

Based on analysts’ consensus 2023 EPS projections of $5.43, Tesla shares trade at only a 20.5x forward earnings multiple. In comparison, the S&P 500 Index currently trades at about 17.4x consensus 2023 earnings forecasts of about $220 per share (which some investors believe may be too optimistic), The Deep Dive said.

However, an oversight made by this argument is that while Tesla's P/E multiple has fallen significantly, the stock is still trading at a much higher valuation than other automakers, each of which is investing heavily in its electric vehicle business. General Motors Company, Ford Motor Company, Toyota Motor Corporation, and Stellantis typically trade at mid-single digit earnings multiples.

The price-to-earnings ratio is the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.

P/E ratios are used by investors and analysts to determine the relative value of a company's shares in an apples-to-apples comparison. It can also be used to compare a company against its own historical record or to compare aggregate markets against one another or over time. A high P/E ratio could mean that a company's stock is overvalued, or that investors are expecting high growth rates in the future. (Investopedia)

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