Demystifying the Economy | Why is Tesla stock worth more than Volkswagen?

Every Saturday, one of our journalists answers one of your questions about the economy, finance, markets, etc. in a group of experts.

Posted at 6am yesterday

Marc Tison

Marc Tison
The press

Can you explain to me why there is such a discrepancy between a stock like Tesla, which was worth up to $900 when the company is making almost no profit, and a Volkswagen stock, which is a huge, profitable company worth about $200 Dollar is that Ford is $15.16 and GM is $38?

Moritz Marier

When comparing security prices, “we’re comparing apples and oranges,” begins Jean-Philippe Tarte, associate professor in HEC Montreal’s finance department.

It’s more of a pizza thing.

“If you want to compare stock sizes, you have to compare market caps,” he explains. Its pizza size, if you will. The price of the promotion simply depends on the number of slices cut from the pizza. »

Currently, GM and Ford’s pizza diameters are about the same, with a capitalization of $60 billion. But because GM issued 1.45 billion shares and Ford issued 4 billion, a tip from the former is worth about $40 and a portion from the latter is worth about $15.

“And the number of outstanding shares is absolutely subjective,” he adds.

This is exactly what the Tesla case shows. As our reader points out, the stock recently touched $900… before splitting into three on August 22nd.

“A Tesla stockholder was granted two additional shares for each share held, our expert explains. In short, we have a smaller slice for the same pizza. »

The size of the pizza

“Well, how do we value securities, do we assess market capitalization? asks Jean-Philippe Tarte.

To determine the size of the pizza, analysts look at the company’s future growth and earnings.

“The higher the expected profits, the higher the value we attach today,” describes our expert. However, there is also the risk that the business poses. This is called the discount rate. The higher the perceived risk, the lower the present value of the benefit. »

The clever combination of these two factors already allows analysts to determine a value for the company.

To make matters worse, slices of this pizza are bought and resold by investors of all stripes. The real price of trading in the market results from the balance between supply and demand.

An analyst who does serious work and comes up with a certain price can be very far from the price we see in the market.

Jean-Philippe Tarte, Lecturer in Finance at HEC Montréal

That is exactly the case with Tesla.

“If we compare it to that of other major manufacturers, why is its capitalization, and therefore the value that investors attach to it, so high? Because right now, investors are very, very optimistic about Tesla’s future earnings growth. »

Optimism is less rampant at Volkswagen, GM and Ford, established companies whose potential is more concrete.

“Is the market right and Tesla is worth almost $1 trillion, or are the markets’ optimism a little overblown? The future will show. »

Do you have questions about personal finance, the world of work, the stock market, finance, technology, management or another related topic? Our journalists will answer one of them every week.

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