Evaluating Tesla stock and market efficiency
Identified as a lithium-ion battery manufacturing company, Tesla has been dedicated “to accelerate the world’s transition to sustainable energy.” Its stock has been rocketing since the initial public offering (IPO) in 2010. Currently, it is traded at $302.52 - 17 times of its IPO price. By analyzing future expectation of the industry and Tesla, together with the past and present performance of Tesla and its comparable companies, it is concluded that the striking stock price is not speculated but reasonably valued. Public information on the performance and expectation helps investors to determine the current price. As more updated information is disclosed to the public, the market adjusts the price and this type of market efficiency is semi-strong.
Lithium-ion battery manufacturing industry is booming, as the revenue in this industry doubled over the 5 years from 2011 to 2016. The industry revenue growth from 2015 to 2016 is 14%. Tesla has a growth in revenue of 73% from 2015 to 2016, in which, 69% increases in motor sales and 1153% increase in the sales of energy storage and solar energy system. Its growth rate is significantly higher than the industry’s, showing its excellence in driving the innovation and the vital role it plays in lithium-ion battery manufacturing industry. Since the “true long term growth can result only from growth in sales,” this growth in sales projects the long-term growth of Tesla. Hence, investors are expecting greater return resulting from Tesla’s growth in sales; thus, the price of Tesla stock is in an upward trend.
There are no major players in this industry. A number of the direct competitors of Tesla are private companies, like Amprius and BessTech, where the financials are not disclosed. According to IBIS, Tesla, General Motors Corp. (GM), Ford Motor Co.(Ford), EnerSys Inc. (EnerSys) and LG Chem Ltd. (LG Chem), each has the market share between 2% to 4%. (See Appendix 1)
Comparing the liquidity ratios and profitability ratios (See Appendix 2), Tesla’s liquidity and profitability performances fall within the boundaries of comparable companies. However, its total liability over total asset ratio is 0.77, which is slightly smaller than those of GM and Ford, showing that most of the company's assets are financed through debt but the level of debt is less than its of GM and Ford. Hence, there is a less financial risk and the company is sustainably growing. Thus, investors would be more favorable to Tesla stock, comparing to others.
The unique product spread of Tesla and the market confidence in its products also contributed to the high stock price. Unlike GM and Ford, where EV is a minor part of the car manufacturing revenue streams, EV belongs to the vertically integrated development chain of Tesla’s clean energy products. This narrow focus on energy products differentiates Tesla from them. Similarly, EnerSys has relatively higher stock price than GM and Ford due to its stable and major corporation with militaries to provide energy solutions. Likely, LG Chem's stock price is materially higher than its competitors for having a diverse and widely integrated product line in the energy system, ranging from military battery to EV battery, but due to the smaller volume of trading in the Korean market, its price is close to but not succeeding Tesla’s.
Overall, the reason for the high price can be summarized by the unique products integration, the careful asset and liability management and investors’ faith in its leadership in the growing industry. However, the price also fluxes and adjusts itself when more information is released to the market. When Tesla published its Q4 of 2016 result, there was a turbulence in its stock price since Tesla didn’t meet the market exception (See Appendix 3), proving that the current stock market is in semi-strong form - the effect of new public information is presented in the price movement.End NoteBibliography
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Appendix 1: Company market share in the lithium-ion battery manufacturing industry
Appendix 2: Comparable company information
- 15.21 is calculated based on the Korean Wong - US Dollar exchange rate on April 20, 2017.
- Data for Tesla Motors, General Motors Corporation, Ford Motors Company and EnerSys Inc. is from www.nasdaq.com; data for LG Chem Ltd. is from quotes.wsj.com
Appendix 3: Tesla Stock Price Hourly Chart from Jan 27 to March 3, 2017