Why Tesla is 10 best stocks to buy now - Motley Fool (Part 2/2)
The article explained why Tesla is considered cheap based on ROCE, efficiency and profitability. It pointed out that higher P/E ratio is acceptable after factor in growth. The article was written about 3 months ago.
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Tesla is more profitable with a higher ROCE
The return on capital employed is a ratio (displayed as a percentage) that shows the return generated on a company's financial assets... Let's do that with Tesla, legacy competitors like Ford and General Motors, and start-up Rivian. Below, you'll see that Tesla has a significantly higher ROCE than all of the others -- Rivian's is profoundly negative at this point:
First, a company must be profitable to generate a positive ROCE; Rivian is still unprofitable, because it doesn't manufacture enough vehicles to offset the costs of running its factories. Next, Ford and General Motors are profitable, but they are straddling two businesses -- the new and old, electric vehicles and legacy combustion engine cars and trucks. Ford recently split its financials for the two sides of the company apart, disclosing that it lost around $3 billion in the past two years in the EV business and will lose $3 billion more in 2023.
Tesla operates more efficiently
Tesla stands out as the most established pure-EV company on the market. Rivian is playing catch-up, and will probably burn billions more in cash as it ramps up production. Meanwhile, Ford and General Motors could see their return on capital employed decrease as they invest in building their EV businesses. They must also continue balancing two types of vehicles that use different technology -- and that added cost burden may make it difficult to operate as efficiently as Tesla.
Tesla is a growth stock, higher P/E ratio is reasonable
This efficiency stands out when it comes to earnings growth. Analysts expect nearly 25% annual earnings growth from Tesla over the long term, and negative growth for Ford and General Motors. That arguably justifies the gulf between Tesla's price-to-earnings ratio (P/E) and the rest of the field.
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I reflected trading experiences by writing journals. My comments are for educational purposes not financial advice.
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