Tesla continues to grow its trailing twelve-month EPS with Q2 experiencing record revenue despite the global chip shortage affecting automotive manufacturers. As a result of Tesla's rate of growth, the P/E ratio becomes less important.
The PEG ratio may be a better indicator of Tesla's valuation because of its rapid growth. As new quarters with greater EPS come in, its P/E ratio declines rapidly as less profitable quarters fall out of the formula. The PEG ratio is the price-to-earnings ratio divided by the EPS growth rate of the company.
Tesla's PEG Ratio
Tesla has demonstrated remarkable growth this year and will need to continue growing to maintain its valuation. While some say the company is overvalued, its PEG ratio may say otherwise. The addition of Q2's EPS resulted in a 492% increase in Tesla's trailing twelve-month EPS YoY despite the lack of high-profit margin vehicles: Model X and Model S. With Tesla's stock price currently around ~690, Tesla stock's trailing P/E ratio is ~359. As it currently stands, Tesla has a trailing PEG ratio of 0.92—generally, a PEG value below 1.0 is considered undervalued.
Comparable PEG Ratios
Tesla is often viewed as a growth company and interestingly, their PEG ratio is lower than some 'value stocks'. Unilever, General Electric, and American Water Works have PEG ratios of 5.16, 10.21, and 5.3*respectively. When compared to other technology-heavy growth companies, the difference is even more dramatic. Shopify, ServiceNow, and Square have PEG ratios of 38.93, 15.48, and 10.36*respectively. If viewed as a car company, Tesla's PEG ratio is higher than the industry average of .68*. This view of Tesla as solely a car company explains why many believe the company is overvalued. However, we are continuously reminded that Tesla is more than 'just a car company' with AI Day approaching August 19th.
How will Tesla stock finish the quarter? Let us know on Twitter @teslapodcast.
Disclosure: Brennan Ertl is long TSLA stock & derivatives.
*PEG ratios reflect 1-year growth expectations.