FIN/SLP Module 4 - SLP LEVERAGE, CAPITAL STRUCTURE, AND DIVIDEND POLICY Review the 1) dividends for the past three years and 2) capital structure of the company you have been researching for your SLP

FIN501 SLP 1

Trident University International

FIN501 Strategic Corporate Finance

March 17, 2024

Tesla is an innovator in the electric vehicle industry, producing all-electric vehicles, solar panels, and battery storage products. As a company leading the transition to sustainable energy, I am interested in Tesla's success and growth potential. The objectives of this paper are to analyze the risk and return profile of investing in Tesla stock (Li, 2024). I will do this by examining Tesla's beta value to assess relative risk compared to the market. I will also analyze Tesla's stock price movements over the last one and five years. Finally, I will compare Tesla's risk measures and stock performance to its leading competitors in the automotive industry, such as GM, to evaluate whether Tesla or its peers offer a more favorable risk-return tradeoff.

Beta Value

Looking up Tesla's stock information on Google Finance, I found that the company has a beta value of 1.88. The beta measures a stock's volatility about the overall market. A beta above 1 indicates that the stock is more volatile than the market. A beta below 1 means the stock is less volatile than the market. With a beta of 1.88, Tesla's stock price tends to fluctuate more than the overall market. Any movements in the market are amplified in Tesla's stock. Therefore, a beta greater than one signifies that Tesla is considered a high-risk investment. Since beta measures the relative volatility of a stock, the high beta value of 1.88 for Tesla confirms that it is riskier than the average stock and should only be held by investors with a higher tolerance for risk.

Fluctuations

Examining Tesla's stock price movements over the past one and five years reinforces the high-risk profile suggested by its beta value. In just the last year alone, Tesla's stock price reached a high of $293.34 in July 2023 but declined sharply to a low of $153.75 in April 2023, representing swings of over 50% from peak to trough. Looking further back over a five-year period, Tesla stock achieved an all-time high of $407.36 in November 2021 based on solid earnings reports. However, it also experienced significant volatility, bottoming out at only $14 per share in June 2019 during production struggles with the Model 3 (GoogleFinance, 2024). The wide fluctuations in Tesla's stock price, sometimes varying over 100% within just a few years, clearly illustrate the high risk and uncertainty involved in this investment.

General Motor Comparison

General Motors is one of Tesla's top competitors in the automotive industry. GM has a beta value of 1.5, which is lower than Tesla's beta of 1.88. This indicates that GM's stock price is less volatile than Tesla's about the overall market. GM's stock performance over the past year showed that its share price fluctuated between a high of $40.93 in March 2024 and a low of $26.85 in November 2023. In five years, the highest price is $63.37 while the lowest is $18.14 in 2020 (GoogleFinance, 2024).

In comparison, Tesla experienced much greater swings over the past year, exceeding 50% from peak to trough. GM's more stable stock movements are likely due to its diversification across more conventional gas-powered and hybrid vehicles, whereas Tesla relies more heavily on emerging electric vehicle technology. Given GM's lower beta and less dramatic share price fluctuations, it can be considered the less risky investment option for those seeking more tempered risk levels than volatile Tesla.

Decision

While Tesla remains a high-growth company positioned at the forefront of innovative electric vehicle technologies, its significantly higher risk level than competitors is a deterrent for more conservative investors. The company's beta value of 1.88 indicates share price swings will be much more volatile than the market. As evidenced over the past one and five years, Tesla's stock fluctuations have exceeded 50% on multiple occasions. For investors seeking more stability, the prospects of such dramatic short-term losses outweigh the long-term upside potential.

GM is a better investment than Tesla for risk-averse investors. GM's stock is less volatile, with a beta value below 1.5 compared to Tesla's higher 1.88 beta. This means GM's price won't change as much as Tesla's with the market. Also, GM's stock price does not fluctuate as much in the last year, staying in a narrower range. Tesla's price moved up and down by more significant amounts. GM makes money in more ways, too, not just in electric vehicles like Tesla. GM sells regular cars with gas engines, too. This helps GM because it will not lose as much if electric vehicles do not sell very well. In general, GM faces fewer uncertainties since its business is more diversified. GM is less risky than Tesla for investors worried about losing money since its stock won't swing up and down as much through price changes.

Conclusion

In conclusion, this paper examined Tesla's risk/return profile through various lenses. Tesla was found to have a high beta of 1.88, signaling greater volatility than the market. Its stock prices exhibited significant swings exceeding 50% over the past year alone. Meanwhile, competitor GM displayed lower risk, evidenced by a beta below Tesla's and more stable share movements. However, Tesla's high-risk profile may be warranted for aggressive investors due to the company's promising role in advancing sustainable energy technologies, which could result in high rewards if successfully achieved. Therefore, the objectives of evaluating Tesla's investment risk through metrics like beta, price history, and industry peers were accomplished.

References

GoogleFinance (2024). Quotes. Retrieved from,

https://www.google.com/finance/quote/GM:NYSE?hl=en&window=5Y

GoogleFinance (2024). Quotes. Retrieved from,

https://www.google.com/finance/quote/TSLA:NASDAQ?hl=en&window=1Y

Li, H. (2024). Tesla stock prediction: a comparative study between four models. Highlights in Business, Economics and Management, 24, 182-187.