If you own stock in Tesla (TSLA), you have watched its slow, disheartening decline since early 2022.

That should come as no real surprise, if you have been watching the stock’s P/E Ratio.

The February 2022 Simpsonville Sentinel issue’s Investors Column noted at that time that Tesla’s P/E Ratio “was at an astronomical 188.43.”  Incredibly, that article notes, one “pundit” thought it could go even higher.

Tesla’s stock price began 2022 at just below $400 per share; by the end of that January, it had fallen to just above $300 per share – a loss of 25 percent in a single month.

Fast-forward to the present:  February 2024.  Tesla’s stock price is hovering just below $200 per share – half its price of two years ago.  If you had $10,000 worth of Tesla stock at the start of 2022, you would only have $5,000 now.

Tesla’s P/E has fallen from that outlandish 188.43, to 45.17 (as of February 23rd) – still too high.  Compare that to GM’s 5.44, Ford’s 11.29, Honda’s 9.40, and Toyota’s 10.60 – all well below what is considered “typical” for P/E Ratios.

What is P/E Ratio?

“P/E Ratio” is short for the ratio of the price per share of a company’s stock to the company’s earnings (for the past year) per share of stock.  

A P/E Ratio of about 17 has historically been considered “normal”.  However, as more people have become stock traders, a P/E Ratio of 20 to 25 may be considered “the new normal”.  

Perhaps all those new traders are busy out-bidding each other, driving up the price of stocks, and thereby increasing the P/E Ratios.

For example, Apple’s P/E Ratio is 28.37.  Microsoft’s P/E Ratio is 37.03.  Both have consistently out-performed the market average over the years, and are generally expected to continue to do so.  Their P/E Ratio reflects that.

Even Norfolk Southern, a railroad with a relatively quiet, unremarkable existence in the world of stocks, has a P/E Ratio of 32.23.  That is the highest P/E Ratio of any railroad, but the others have P/E Ratios in the 20s as well.

A lower P/E Ratio indicates that either a stock is undervalued (low expectations by those buying stocks) or the company has been underperforming relative to other companies.  

Similarly, a higher P/E Ratio indicates that the company has been outperforming other companies, or the market (i.e., stock buyers) have greater-than-average expectations for the company’s future performance.  

If stock buyers interpret the available information as evidence that a particular company will have unusually good future performance, they buy its stock, driving up that stock’s price.  That causes the P/E Ratio to increase.

The falling P/E for Tesla means that the real world – in this case, the recent spate of news about inherent problems with EVs – is catching up with all the promotional hype surrounding Tesla.  

Capitalism at work

Remember that, like yourself, every buyer of stock does so with the aim of increasing his level of income to the highest amount possible.  Stock buyers purchase the stocks they think will earn them the most money.  

tock buying should be considered your “second job”.  The stocks you own should be working for you while you are working at your day job.  Both jobs should produce income for you.

Is buying stocks a gamble?

Definitely not – unless you fail to do your “job” as a buyer of stock.  That includes learning what you can about the market, the economy, the effect of government actions that impact the economy, and the internal decisions made and actions taken by the companies whose stocks you are considering for purchase.  

The person who thinks that buying and selling stocks is gambling fails to do those things.  

Buying and selling stock requires the same consideration as any part of your life:  what classes to take in school, whether and where to go to college and what to major in, the choice of where to look for a job – a state with high taxes or low, whether you choose to live in a city, a town, or rural area, what car you buy, whom you marry and why, whether to have children and how many – if you fail to give those things the level of consideration and thought which they deserve, you are gambling with your life.  If you buy stocks with that same attitude and lack of consideration, then for you the stock market will be a gamble as well.  

Following the crowd, the latest fads, and the latest trends is just as bad when buying stocks as it is in every other part of your life.  

Think for yourself.

Taking into consideration the Price/Earnings Ratio is one of the factors which you as a stock trader should consider, when living by your own standards and making your own decisions.  

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