Competition and Valuation: A Case Study of Tesla Motors

Abstract

Tesla’s rapid rise to become one of the world’s most influential automakers has marked the start of a new era in the global automobile industry, where many of the traditional auto companies were overshadowed by Tesla’s dominance. Judging from Politics, Economy, Society and Technology perspectives, Tesla’s market value can potentially be overvalued due to its leading role in the Electrical vehicle market. Economically, Tesla facilities the growth of global economy by creating more employments and manufacturing factories. Socially and politically, Tesla’s Electrical Vehicle reduces the level of negative externalities (e.g., pollution), which aligns with the developmental frameworks proposed by governmental policies and regulations. Meanwhile in technological aspect, Tesla pioneers the innovative design of battery pack to reduce the overall cost of battery and seeks to integrate better automatic driving system into electrical vehicle. Given those merits of Tesla, overoptimism on its stock price is expected. Therefore, it is important for stock traders who are willing to throw money at Tesla to ruminate over their choices before making the investment. In this study, the results of valuation methods indicate that true market value of Tesla has been overestimated due to its irregularly high operating cash flow, price-to-earnings ratio and enterprise value to earnings before interest, taxes, depreciation, and amortization ratio, suggesting its stock price is overvalued.