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A Do-It-Yourself (DIY) Valuation of Tesla Inc (TSLA): Of Investment Regrets and Disagreements!

I was hoping to move on from Tesla Inc (NASDAQ: TSLA) to my data update posts, but my last post on Tesla drew some attention, in good and bad ways, partly because of its timing. Right after I sold my shares for $640, last week (January 30), the stock took off, climbing to more than $900/share in the matter of days. As always, there were people on both sides of the great Tesla divide commenting on my valuation, with bears accusing me of wearing rose-colored glasses and making unrealistically optimistic assumptions, and bulls pointing to inputs that they felt under estimated the company’s potential.

 

I wish that I had been clearer in my writing that the numbers that I was using did not represent “the” valuation of Tesla but that this was “my” valuation of the company, and that I not only expect disagreement, but I think it is part and parcel of a healthy market. Rather than leave that view as an abstraction, I thought I would revisit the valuation and present it in a different format, one in which you can choose your story for Tesla and estimate the value for yourself.

 

Tesla Motors Inc (NASDAQ:TSLA), Car, Showroom, Customer, Logo, Automotive, Brand, Shop, Sales, Building,

Hadrian / Shutterstock.com

 
The Key Levers of Value
In my earlier post, I valued Tesla and presented my valuation in a picture, where I connected the story that I was telling about the company to my estimated value per share of roughly $427 per share:

 

 

Download spreadsheet

 

If you find the numbers off putting or overwhelming, the value is determined by four key levers:

 

1. The Growth Lever: The revenue growth rate controls how much and how quickly the firm will be able to grow its revenues from autos, software, solar panels and anything else that you believe the company will be selling. Rather than focus on the growth rate, I would suggest looking at the estimated revenues in 2030 (ten years out). In my Tesla story (valuation), I have estimated revenues of $125 billion in 2030, a five-fold increase over the 2019 revenues.

 

2. The Profitability Lever: The target (pre-tax) operating margin determines how profitable you think the company will be, once its growth days start to scale down. Since these are operating margins, not gross or net margins, they are after all operating expenses (cost of goods sold, SG&A etc.) but before any financial expenses (interest expenses). In keeping with my view that R&D is really a capital expense, I capitalize R&D, which improves Tesla’s profitability, and target an operating margin of 12% by 2025.

 

3. The Investment Efficiency Lever: To grow, companies have to invest in production capacity and the sales to invested capital drives how efficiently investment is done, with higher sales to capital ratios reflecting more efficiency. With Tesla, I assume that every dollar of investment (in new factories, technology and new R&D) in the first 5 years generates $3 in revenues, as it utilizes excess capacity in the early years, and that this efficiency drops back by a third, as capacity constraints hit.

 

4. The Risk lever: There are two inputs in this valuation that incorporate risk. The first is the cost of capital that I start the valuation with, a reflection of risk as seen through the eyes of a diversified investor in the company. The second is the likelihood of failure (or distress), where the company has to liquidate assets and lose the additional value that it could have generated as a going concern. With Tesla, I set this cost of capital at 7% and assume that given its marginal profitability and significant debt load, the chance of failure is 10%.

 

The value per share of $427 comes out of these assumptions and is driving my investment decisions. Since this is my story and valuation, I expect and welcome disagreement on any and all of these inputs. After all, I don’t have a crystal ball to forecast the future or a monopoly on the right estimates.

 

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