Book value versus market value
A Guardian headline in recent days says “Tesla shares soar 40% after analyst says firm’s value could hit $1.3tn“. Similar headlines could be seen in other newspapers. So, the market values Tesla at $1.3 trillion, yet their 2018 10K shows assets valued at around $30 billion, and accumulated losses of $5.3 billion. So, why are these values so different? This is something students of mine often ask. I’ll try to give a simple answer.
The market value is based on expectations for the future, and these drive up the share price – some media sources though suggest the price is being driven by short sellers trying to buy shares to cover losses they may be making as they bet against Tesla shares rising in price. Accounting values are in general based on historic cost – what was paid for something in the past. Also, for example, accounting does not include items which do not have a historic cost – such as the Tesla brand name. Thus, accounting statements do not reflect future plans or values in general. If another business were to buy Tesla, then its actual (market) values would be captured by accounting of course – brand value, goodwill and such things not captured previously. At this purchase point, there is a historic cost.