Valuation multiples are commonly used in capital-intensive industries such as the auto industry (IYK). However, it’s also important to note that valuation multiples are only useful in comparing companies of similar size and nature of business.
Now, let’s take a look at Tesla’s (TSLA) 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. The EV-to-EBITDA multiple values the worth of an entire company, including the equity and debt portion.
As of April 5, 2017, Tesla’s forward EV-to-EBITDA multiple was 40.6x. It’s calculated based on the company’s estimated EBITDA for the next 12 months. At the end of fiscal 2016, the multiple was hovering around 26.1x.
In Tesla’s case, no other publicly listed automaker is similar enough to the company’s business model. However, it’s interesting to see how Tesla’s valuation multiples rose in the last quarter, unlike other automakers including General Motors (GM), Ford (F), and Ferrari (RACE).
Factors to watch
As noted in the previous part of this series, Tesla will start producing and delivering Model 3 in 2H17. Investors’ anticipation on Tesla’s ability to deliver Model 3 in a timely manner could be the primary reason why the company’s multiples have gone up sharply in the last three months. Therefore, any signs of a delay in Model 3 production and deliveries could hurt Tesla’s valuation multiples going forward.
It’s important for the company to maintain its high automotive margins in the coming quarters. Shrinking gross margins could lower Tesla’s future earnings estimates and valuation multiples, which could have a negative impact on investors’ sentiments on Wall Street.
In the next part, we’ll look at Wall Street analysts’ recommendations for Tesla stock.