Tesla Trades at 140 Times Forward Earnings. Here's What Has to Go Right to Justify This Valuation
It needs to achieve growth on multiple fronts, but most of the steep valuation is rooted in one particular business's potential.
Overview
There's no denying Tesla (NASDAQ: TSLA) is one of the market's most exciting growth companies right now. But, currently priced at 140 times next year's expected earnings of $2.23 per share, there's also no denying Tesla stock is outrageously expensive. For perspective on that figure, the S&P 500's forward-looking price-to-earnings (P/E) ratio right now is only 21.
Sure, plenty of stocks have been rightfully valued at sky-high levels like this in the past. Think Amazon, or Cisco back in the 1990s. These outfits were positioned to capitalize on the internet's then-budding explosion. Investors were willing to pay a steep price because future growth was likely to be strong enough to justify the premium.
Details
This doesn't hold true every time, though. Sometimes, the assumptions of future growth driving wildly high P/E ratios end up being just plain wrong. Businesses such as Groupon, GoPro, and meal-kit company Blue Apron come to mind. Only in retrospect did the flaws in these companies' business models become evident.
Source
Originally published at www.fool.com.