Why it doesn’t really matter in the short term
For decades, the price to earnings (P/E) ratio has been a cornerstone metric for investors to evaluate companies. It measures how much investors are willing to pay for each dollar of a company’s earnings. Traditionally, a low P/E ratio was considered a hallmark of value investing a strategy championed by the likes of Warren Buffett. This approach works well for mature companies with stable revenues and profits.
But as we’ve entered an era of rapid technological innovation, the rules have shifted. Sticking rigidly to value investing principles in 2020 and beyond could mean missing out on massive growth opportunities, particularly with companies like Tesla. The debate between value and growth investing is more relevant than ever, and Tesla sits squarely at the heart of this conversation.
Why the P/E Ratio Was Once King
Historically, the P/E ratio was a reliable indicator of whether a stock was undervalued or overvalued. A lower ratio suggested that a stock might be a bargain, while a higher ratio could indicate overvaluation. For value investors, buying stocks with low P/E ratios was the path to steady, long term returns.
This strategy worked well for companies in industries like manufacturing, consumer goods, or energy sectors where growth was predictable and incremental. Investors could look at a company’s earnings today and reasonably assume those earnings would continue to grow at a modest pace.
The Shift: Growth Investing Takes the Lead
However, for high growth companies like Tesla, the P/E ratio becomes far less relevant. Tesla’s P/E ratio has often been cited as “too high,” with critics claiming the stock is overvalued. But what these critics miss is that investors aren’t buying Tesla for what the company is doing today, they’re buying it for what it’s poised to do in the future.
Not pricing in these future earnings is also why Tesla’s price targets from analysts often align closely with the current stock price. Analysts are not projecting what Tesla could achieve in the coming years. This forward looking perspective is primarily driven by retail investors, who hold a significant percentage of Tesla shares.
This high level of retail ownership highlights a critical point: much of the “big money,” including institutional investors, has yet to fully recognize or act on Tesla’s long term potential. As institutional investors wake up to Tesla’s future growth, the demand for shares and the stock price is likely to surge even further. This dynamic underscores the forward thinking conviction of retail investors and the untapped opportunities still ahead.
The Next Wave of Valuation Changes
What happens when Tesla’s future earnings start materializing? Once FSD and Optimus become profitable, these models will have to be incorporated into Tesla’s valuation. Analysts will revise their price targets upward, and the market will respond with significant buy pressure.
As Tesla continues to refine its software, the company could transform millions of vehicles into revenue generating autonomous taxis. This business model would not only increase profits but also shift Tesla’s valuation metrics entirely. Similarly, Optimus has the potential to disrupt labor markets globally, creating a whole new revenue stream that far exceeds what the company earns today.
Once Tesla’s humanoid robots achieve commercial success, the potential revenue dwarfs anything the automotive sector can generate. These robots could transform industries from manufacturing to healthcare, creating entirely new markets.
When these revenue streams are factored into Tesla’s price targets, the result will be a surge in demand for the stock, pushing it even higher.
Conclusion: The Case for Growth Investing with Tesla
Tesla’s P/E ratio has long been a point of contention, but focusing solely on this metric misses the bigger picture. Tesla investors aren’t just buying into an automaker they’re buying into a vision of the future where Tesla dominates industries as diverse as energy, AI, robotics, and autonomous transportation.
Clinging to traditional value investing principles in today’s market could mean missing out on the immense growth potential of companies like Tesla. As FSD, Optimus, and other revenue streams come online, Tesla’s valuation will only grow more compelling, driving significant buy pressure and long term returns for those who invest with conviction.
If you’re ready to start investing, we recommend our trusted partner, Revolut. Get started today by clicking here.
Disclaimer:
The content provided here reflects our personal perspective and analysis. It is not intended as financial advice. For personalized financial advice tailored to your specific circumstances, please consult a licensed financial advisor.
