Posted at 6:00 a.m.
Can you explain to me why there is such a disparity between a stock like Tesla which has been worth up to $900, when the company is making almost no profit, while a Volkswagen stock, which is a huge profit-making company worth about $200, that Ford is US$15.16 and GM is US$38?
Maurice Marier
By comparing the price of securities, “we are comparing apples and oranges,” begins Jean-Philippe Tarte, lecturer in the finance department at HEC Montreal.
It’s more of a pizza thing.
“If you want to compare the size of stocks, you have to compare market capitalization,” he explains. Its pizza size, if you will. The price of the action simply depends on the number of slices cut from the pizza. »
Currently, GM’s and Ford’s pizza diameters are roughly similar, with a capitalization of US$60 billion. But because GM issued 1.45 billion shares and Ford issued 4 billion, a tip of the former is worth about $40, and a portion of the latter, about $15.
“And the number of shares outstanding is totally subjective,” he adds.
This is precisely what the case of Tesla shows. As our reader points out, its stock recently reached US$900… before it was split into three on August 22nd.
“The holder of a Tesla share was granted, for each share he held, two additional shares, describes our expert. In short, we have a smaller slice for the same pizza. »
The size of the pizza
“Now, how do we value securities, assess market capitalization? asks Jean-Philippe Tarte.
To fix the size of the pizza, analysts look at the company’s future growth and earnings.
“The higher the anticipated profits, the higher the value we assign today,” describes our expert. However, there is also the risk that the business presents. This is called the discount rate. The higher the perceived risk, the lower the present value of the benefits. »
The skilful combination of these two factors allows analysts to establish a value for the company as of today.
What complicates matters is that the slices of this pizza are bought and resold by investors of all stripes. The real price of the action on the market therefore results from the balance between supply and demand.
An analyst who does a serious job and who arrives at a certain price may be very far from the price we see on the market.
Jean-Philippe Tarte, lecturer in the finance department at HEC Montréal
This is precisely the case of Tesla.
“When we compare it to that of other major manufacturers, why is its capitalization, and therefore the value that investors place on it, so high? Because right now investors are very, very optimistic about Tesla’s future earnings growth. »
Optimism is less unbridled in the case of Volkswagen, GM and Ford, well-established companies whose potentialities are more concrete.
“Is the market right and Tesla is worth close to $1 trillion, or is the markets optimism a little too inflated? The future will tell. »
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