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Factors That Could Drive Tesla’s Valuation Multiples in 3Q17

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Dec. 4 2020, Updated 10:52 a.m. ET

Valuation multiples

Valuation multiples are widely used in capital-intensive sectors such as the automotive industry. However, we should only use valuation multiples to compare companies that are similar in terms of business, financials, or size. As a result, no other publicly listed automaker is similar enough to Tesla (TSLA) to draw a close comparison.

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Tesla’s high valuation

On August 3, Tesla’s forward EV-to-EBITDA[1. earnings before interest, tax, depreciation, and amortization] multiple was 38.9x. This was calculated using the company’s estimated EBITDA for the next 12 months. Likewise, Tesla’s forward EV-to-sales multiple was 3.9x.

Tesla’s valuation multiples tend to be much higher than other legacy auto giants such as General Motors (GM), Toyota (TM), and Ford (F). Industry analysts have questioned Tesla’s high valuation multiples from time to time. Tesla can’t be valued using the same metrics as these legacy auto companies (IYK) due to significant differences in their business models and sizes.

Factors to watch in 3Q17

In 2Q17, Tesla (SLA) demonstrated positive YoY (year-over-year) growth in its vehicle deliveries and revenues with stable profitability. In 3Q17, higher costs related to the Model 3 production ramp-up could hurt TSLA’s gross margins as guided. Despite a temporary and expected drop in the company’s profitability, the market should remain focused on Model 3 production and delivery srate in the next few quarters.

Slower-than-expected Model 3 production growth could hurt Tesla’s future earnings estimates and drive its valuation multiples lower in 3Q17.

In the final part of this series, we’ll look at Wall Street analysts’ recommendations on Tesla stock after its 2Q17 earnings event.

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