What if I told you that there’s a tech company producing electric cars that are actually making a profit? (Cue the collective disbelief.) Well, you don’t have to believe me, because Cathie Wood does, and Cathie Wood knows her stuff.
She’s the CEO of ARK Invest, an investment research firm that tracks emerging trends in science and technology. She recently gave her take on Tesla’s recent upward spike with CNBC, and it’s safe to say that she isn’t your typical Tesla fanboy like so many others out there.
5 Reasons why stock market capitalization doesn’t work
- Stock market capitalization doesn’t take into account the cash that a company has on hand.
- Companies can issue new shares, which dilutes the value of existing shares.
- Share prices can be artificially inflated or deflated by traders.
- Some companies have multiple classes of stock, which complicates things further.
- finally, accounting practices can differ from country to country, making it difficult to compare companies on a global scale.
To get around these challenges, Wood recommends using enterprise value as an alternative metric. That’s particularly important because companies like Tesla are spewing cash, and investors should be very concerned about that, Wood said. Tesla has had more than $1 billion in quarterly cash outflows over the past 12 months. Tesla is the biggest spender on CAPEX [capital expenditures] and capital raising of any U.S.-listed public company, Wood said. (Source: Tesla Is SPEWING CASH, Barron’s) So what’s happening with all that cash?
3 alternatives to market capitalization (or CAPE)
1. Dividend Yield: A company’s dividend yield can give you an idea of how much income you can generate from owning shares of stock. For example, if a company has a dividend yield of 3%, that means you would receive $3 in dividends for every $100 worth of stock that you own.
#2. Book Value Per Share: Another alternative to market capitalization (or CAPE) is book value per share. This number represents what shareholders would receive if all of a company’s assets were sold and all of its liabilities were paid off, thereby leaving nothing for investors and stockholders. Because book value can fluctuate over time as assets are bought or sold, you should compare a company’s current book value with its historical book value when analyzing it as an alternative metric.
5 Alternatives to market capitalization (or CAPE)
3. Market Cap/Tangible Book Value: If a company has more intangible assets than tangible ones, then this ratio will be greater than 1. The inverse would also be true; if a company has more tangible assets than intangible ones, then this ratio will be less than 1.
2 What Elon Musk Says About CAPE Ratio
In an interview with Cathie Wood, Elon Musk discussed Tesla’s recent cash flow and what he sees for the future of the company. He said that Tesla is spewing cash and that they have no plans to raise money in the near future. He also mentioned that Tesla will be profitable in 2022. Musk said that the current CAPE ratio is baked in and that Tesla’s stock price could rise significantly over the next few years.
Musk also mentioned that he expects people to continue moving towards electric vehicles. He said, We are definitely winning on the technology front but we need to win on price and manufacturing scale. He believes that Tesla will be profitable by 2022. Wood did mention however that they are currently heavily dependent on government incentives which may not last forever. These comments will surely affect Tesla’s stock price as many have been betting against Musk’s predictions of profitability in 3 years.
There are many factors which go into determining whether or not an investment will be profitable. For example, a company could have amazing products and brilliant leadership but if they aren’t able to sell their products at a price that provides profit for both themselves and investors then it might be time to reconsider your options. That’s why it’s always important to research companies that you’re thinking of investing in before putting your money forward. For example, if Tesla does turn out to be profitable by 2022 but its price-to-earnings ratio is too high then you’ll want to look elsewhere for your return on investment. (Be sure to check out The 10 Best Tech Stocks To Invest In Right Now.)
1 How Robert Shiller developed his CAPE ratio
Robert Shiller, a Nobel Prize-winning economist, developed the Cyclically Adjusted Price-to-Earnings (CAPE) ratio to smooth out fluctuations in earnings due to the business cycle. The CAPE ratio is calculated by dividing a company’s stock price by its average earnings over the past 10 years. Tesla’s current CAPE ratio is about 11.4, which means that its stock price is about 11.4 times its average earnings over the past 10 years. This is high compared to historical averages, but it’s not unusual for growth stocks. For example, Amazon’s CAPE ratio was around 11 during the dot-com bubble.
The problem with Shiller’s CAPE ratio is that it doesn’t consider a company’s expected future earnings. A more useful valuation model would calculate how much investors are willing to pay for a share of profits from each dollar of sales. One way to do so is by dividing the price-to-sales (P/S) ratio by economic growth plus interest rates. It turns out that if you use an adjusted P/S ratio based on 10 years of earnings and subtract it from 3%—representing economic growth plus interest rates—you get close to Tesla’s current stock price.
Cathie Wood, founder and CEO of ARK Invest, recently spoke about Tesla and the current state of the economy. Wood said that Tesla is spewing cash and doing well despite the current recession. She attributes this to Tesla’s innovation and efficient production. Wood also said that she believes the US is in a recession, but that it is not as bad as some people think. She attributed this to the fact that there are still many people employed and that there has been no decrease in wages. Wood concluded by saying that she is bullish on Tesla and believes that the company will continue to do well despite the current economic conditions.
Wood thinks that Tesla has an edge over its competitors because of how it produces cars. It builds them from scratch rather than producing them from pre-made parts, which means that it can make cars more efficiently and more cheaply. She said that she had previously questioned Tesla’s plan to produce 500,000 cars by 2022. She had thought it would be impossible for them to reach their goal due to production issues and high costs. However, now she thinks they might be able to pull it off.