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Tesla Inc (TSLA)’s Travails: Curfew for a Corporate Teenager?

It should come as no surprise to anyone that Tesla Inc (NASDAQ: TSLA) is back in the news, though it seems to be for all of the wrong reasons. From Musk’s Twitter escapades with the SEC, to talk about electric lawn blowers to concerns about a debt death spiral, the company has managed, yet again, to get in its own way, and this time, it has paid a price in the market, as its stock price tests lows not seen in a couple of years. I would be lying if I said that I do not find the company fascinating, and as has been my pattern for the last six years, it is time for a Tesla valuation update.

 

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Copyright: wolandmaster / 123RF Stock Photo

Looking Back: My Tesla Posts in 2018
In my last valuation of Tesla, set in June 2018, I considered possible, plausible and probable valuations for the company. In my story, which I admitted was an optimistic one, I mapped out a pathway for the company to deliver $100 billion in revenues in 2028, while pushing pre-tax operating margins to 10% by 2023. The value that I obtained for the stock was $170-$180 per share, depending on how the very generous option package (20.2 million options) granted to Musk were treated, and is in the picture below:

 

 

In that post, I also listed possible, perhaps even plausible, scenarios where Tesla’s value per share could be higher than $400/share, but argued that it would require the equivalent of a royal flush for the company to get there, a combination of a ten-fold increase in revenues, an operating margin of 12% and reinvesting more like a technology than an automotive company. Since the stock was trading at close $360 at the time of the valuation, I concluded that it was significantly over valued. True to form, Elon Musk roiled the waters in August 2018 with his now infamous tweet about funding being secured for a $420 buyout of the stock, causing a surge in the stock price, before questions arose about both how secured the funding actually was and whether the $420 price itself was fiction.
In my post on the topic, I argued that if you were a private equity investor interested in taking a company private, Tesla would be a poor target, given its need for capital to keep growing, its heavy debt burden and the presence of Elon Musk as CEO. In the months after, both Musk and Tesla paid hefty prices for the indiscreet tweet, with the former in the SEC crosshairs for alleged stock price manipulation and the latter having to fight through the fog to get its story heard.
Catching up with the news
If you are wondering how much can happen in a year, you obviously don’t follow Tesla, since the company is a magnet for newsworthy events. Borrowing a movie title to categorize what’s happened to the company in the last year, I would break the news down into the good, the bad and what I can only term as gobsmacking, where you whack your head and say “what the heck was that?”
 
1. The Good
The market momentum has clearly shifted against Tesla, and all the news about the company seems to skew “bad”, it is worth noting that there are good things that have happened at the company over the last year:
  1. Revenue Surge: In the drama around production targets and logistical misses, it is easy to lose sight of the fact that the Tesla 3 has caused the company to almost double revenues over the course of the last year, while easily winning the race for best selling electric car in the world.
  2. Improving Profitability: While Musk’s tweets about Tesla turning earnings positive may have been premature, the company has moved down the pathway to profitability, reducing operating losses and with R&D capitalized, perhaps even turning the corner on operating profitability.
In short, the operating base on which I will be building my Tesla valuation in June 2019 will be a more solid one than the one that I was using in 2018.
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