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

The first component in the risk lever is the cost of capital, and to provide a sense of what costs of capital look like around the world at the start of 2020, let me start with a cost of capital distribution for all publicly traded companies:

Note that the median cost of capital across all firms globally is 7.58%, and that 50% of all publicly traded firms have costs of capital that fall between 6.27% and 8.71%. It is true that costs of capital vary across different industries, and while you can get the entire list on my website, the median cost of capital for auto firms is 6.94% and for tech firms, it is 8.86%. While I used 7% as my cost of capital, you may disagree and here are your choices:

The other component of risk is failure, where the company faces the risk of having its life truncated, either because it runs out of cash or because of debt payments coming due. While the rise in stock price has reduced its vulnerability for the moment, those who see more losses in the future and continued borrowing to fund investment may attach a higher probability of default than the 10% that I use, whereas those who believe Elon’s claims that Tesla has entered an era of positive earnings and cash flows, may decide that Tesla has no risk of failure any more:

I have created a front end for my Tesla valuation spreadsheet that allows the choices you made to drive the valuation. Running through the different combinations for the four variables, I have too many to list individually, but consider a subset in this table:

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Broadly speaking, there are four broad stories that I have valued here:

1. The Big Auto Story: If your story is that Tesla will emerge from its growth period as one of the largest auto companies in the world (revenues of $100- $300 billion in year 10), with top-tier auto company margins (7.42%), investment efficiency (2.42) and cost of capital (6.94%), the value per share ranges from $106/share (with BMW like revenues) to $227/share (with Daimler-like revenues) to $333/share (with VW/Toyota like revenues).

2. The Techy Auto Company Story: An alternate story is that Tesla is an auto/software/services company with tech company characteristics, giving it higher margins (10.25%) and a higher cost of capital (8.86%). With this story, the value per share ranges from $111/share (with BMW like revenues) to $212/share (with Daimler-like revenues) to $298/share (with VW/Toyota like revenues). Put simply, the higher risk nullifies the benefits of higher profitability.

3. The FAANGy Auto Company: In this variant of the tech story, Tesla not only develops a tech twist, but becomes as successful as the most successful tech companies (I use the FAANG stocks + Microsoft). In this story, the margins approach 18.97% and with a tech cost of capital, the value per share ranges from $459/share (with BMW like revenues) to $855/share (with Daimler-like revenues) to $2,106/share (with VW/Toyota like revenues).

4. The Make-your-best Company: In this variant, I give Tesla the best possible outcomes on each variable, revenues like VW/Toyota, margins like pure software companies (21.24%), a sales to capital ratio that is higher than any of the sector averages (4.00) and a cost of capital of an auto company (6.94%), and arrive at a value per share of $2106.