Describe completely which method you believe provides a more reliable indication of future value

Question#6 Analysts use both asset valuation and future sales growth as indicators of current stock stock values. Describe completely which method you believe provides a more reliable indication of future value, include in your discussion examples provided in class to enhance your response. Indicate the importance of the types of assets that appear on the financial statements as indicators of future value and the problem with off-balance sheet financing as an impediment to realistic valuation.

MEMO

DATE:             December 18th, 2020

TO:                  Professor Constance Crawford

FROM             Tippayarat Stevens

RE:     Future sales growth can influent to the current stock value. Importance of the types of assets on financial statements as indicators of future value and the problem of off-balance sheet financing as an impediment to realistic valuation.

Case Overview

The asset valuation is the type of valuation that focuses on the value of a company’s assets, the fair market, or present value(CFI). The future sales growth will determine the company’s future ability to generate profit. The investors can see the growth potential of Tesla. Especially the CEO, Elon Musk has a very strong vision to carry on the business. He makes the investors believe that there will be a lot of sales happening in the future. His behavior is different from other CEOs but it seems like this helps Tesla gain a lot of funding for the company. As we can see, Tesla’s stock price is very high, almost hitting $600 (Yahoo). On the other hand, Exxon is an energy company which currently uses less. Exxon’s stock price is decreasing. Additionally, the importance of assets are able to impact the investor as well. The liquidity of the asset is the key. Besides, the investors should consider the off- balance sheet information as well.

Research Conducted

Tesla is an electric car company. Its stock price has been increasing so fast since 2019 (Yahoo). On January 1st, 2019, the stock price was at $130.11 and it went up to around $600 per share(Yahoo). Even though Tesla wasn’t considered to join S&P 500 initially,  finally, Tesla  will be added to the S & P 500 on December 21,2020( Tesla Stock). Tesla has not been profitable yet. As on the balance sheet of 2020, its accumulated deficit is $6 billion( SEC). Tesla does not have the expense on  off-balance sheet while they reported last quarter(SEC). Tesla has their cash  increased  in 2020 which is $113. On the opposite, Exxon stock price used to be high at $100.68 on April 1st,2014  but it dropped down to 43.58 on December 10th, 2020(Yahoo). Furthermore, Exxon’s balance sheet shows that it does not have any accumulated deficit. However, Exxon still  has a lot of crude oil on its inventory .The Corporation recognizes a credit allowance for off-balance sheet credit exposures as a liability on the balance sheet, separate from the allowance for credit losses related to recognized financial assets(SEC).

Analysis of the Issue- or a SWOT Analysis-Data Analysis

In my opinion, future growth will indicate the current stock value. For example, Tesla has a higher price than Exxon, even though Tesla is still not profitable. Because Tesla is a technology company that produces electric cars. As the investor sees the potential growth of the technology will come instead of the energy. Exxon is an energy company. We all know  that one day the energy will be gone. Now the world tends to use more clean technology(Tesla). We try to reduce the air pollution. Because of the pandemic, people stop traveling and work from home. It decreases demand for gas. As many companies get used to the new normal for working from home, it even makes companies reduce their rent expense. They might have people work from home longer. No traveling, no using gas. When we look at both the companies balance sheet, Exxon has a significant on their inventory. In the beginning of the pandemic, there was a problem between Russia and the OPEC group, because the crude oil did not have a place to store it. In the future , the investors will not be sure that crude oil will be used.Unlike, Tesla, the investor looks in the fire about clean energy. Even though Tesla is not profitable yet, investors still want to invest which causes the stock price to increase. It seems like Tesla’s off balance sheet does not have significant issues. Similarly, Exxon does not have any big issue on its balance sheet as well.

Recommendations: compare and contrast

Apparently, Tesla stock is increasing rapidly. Investors believe the future growth will be used to evaluate Tesla stock. Moreover, investors should be more careful. Elon Musk also mentioned it as he said ““I even said the stock was too high(Dawkins).”

Reference

https://www.tesla.com/about

https://finance.yahoo.com/quote/TSLA?p=TSLA

https://finance.yahoo.com/quote/XOM?p=XOM&.tsrc=fin-srch

https://www.sec.gov/ix?doc=/Archives/edgar/data/34088/000003408820000090/xom-20200930.htm

https://www.sec.gov/ix?doc=/Archives/edgar/data/1318605/000156459020047486/tsla-10q_20200930.htm