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What Could Affect Tesla’s Valuation Multiples in Q3 2018?

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

Tesla’s valuation

On August 2, Tesla’s forward EV-to-EBITDA (enterprise value-to-EBITDA) multiple was 25.7x based on the company’s estimated EBITDA for the next 12 months.

In the last six months, TSLA’s forward EV-to-EBITDA multiple has fallen from 33.7x to 25.7x.

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EV-to-sales multiple

Similarly, Tesla’s forward EV-to-sales multiple was 2.5x on August 2 compared to 3.3x about six months ago.

Despite their recent falls, Tesla’s valuation multiples are still much higher than those of legacy auto giants General Motors (GM), Toyota Motor (TM), and Ford Motor Company (F). GM, Toyota, and Ford had EV-to-EBITDA multiples of 8.0x, 8.3x, and 13.8x, respectively.

However, TSLA shouldn’t be valued using the same metrics as these legacy auto companies (XLY) due to differences in their business models and sizes.

Key factors to watch in the third quarter

In the second quarter, Tesla’s adjusted quarterly losses eased off its first-quarter record losses. At this stage, the company may continue to require investments to increase its Model 3 production further. A slower-than-expected car production rate could take a toll on its financial figures and become an obstacle to its goal of becoming profitable in the third quarter.

However, economies of scale due to a sharp jump in production could reduce Tesla’s manufacturing costs and help it improve its gross margin in the third quarter. Other external factors, including higher raw materials costs and currency headwinds, are expected to negatively affect its margin in the medium term.

This quarter, investors should continue to focus on developments related to the Model 3’s production rate. A slower-than-expected (5,000 units per week) average Model 3 production rate could affect Tesla’s future earnings estimates and drive its valuation multiples lower in the quarter.

Read the next article to learn about analysts’ recommendations on Tesla stock after its second-quarter earnings event.

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