Valuation multiples are widely used in the auto industry to compare companies. However, it’s important to understand that we can only use valuation multiples to compare companies that are similar in nature in terms of business, size, or financials. In Tesla Motors’ (TSLA) case, no other publicly listed automaker is similar enough to the company’s business.
Tesla’s valuation multiples
We’ll start by looking at an important valuation multiple—EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization). EV is the market value of equity and debt less cash and cash equivalents. As of November 23, 2016, Tesla’s forward EV-to-EBITDA multiple was 22.8x. It’s calculated based on the company’s estimated EBITDA for the next 12 months.
Likewise, Tesla’s forward PE (price-to-earnings) multiple is 107.6x. It’s important to note that Tesla can’t be valued with the same metrics used for other automobile companies (FXD) including General Motors (GM), Ford (F), and Toyota (TM).
What could affect these multiples?
As we noted earlier in this series, Tesla demonstrated solid positive growth on all fronts. It became cash-flow positive in the third quarter this year. Now, the company’s ability to sustain the growth will be key for its future growth estimates to remain high and drive its valuation multiples.
After the merger with SolarCity (SCTY), Tesla’s valuation multiples will depend on the growth potential of its energy business. Therefore, sustainable growth in the company’s energy business could be positive for its future growth estimates and valuation multiples.
In the next part of this series, we’ll look at analysts’ recommendations for Tesla stock.