In an interview yesterday, I was asked how I would go about valuing Tesla...
What would be the most appropriate way to answer this question? And what are some of the most important things you would need to consider.
Would you use a DCF with a long projection period so that you capture the years in which Model 3 production is at full-steam?
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bump, and may I ask if this was for a SA or FT?
This was in a FT interview for a boutique. I also spoke to a friend who got this question in a SA interview last year.
I would value Tesla at 0 and say that there is no model in the world that could accurately predict the proper value for the company. Here's why - the equity value reflects the insanity that is the cult of Elon Musk. There is no amount of rationalization for why the equity value is so high despite the fact that Tesla is an automotive company being valued like a Tech company.
That said, I would use a DCF approach and supplement that with comps. For the DCF, I would need to consider all of the production data from Tesla across all car lines to account for the probability of meeting production deadlines especially when it comes to getting the Model 3 out to market. In the same vein, I would want to consider the deposit refund rate for all classes of cars to account for the reduction in deferred revenue that would happen. I would need to know the terms and conditions of any and every tax credit that Tesla uses to incentive their cars in order to accurately reflect the top line revenue and develop an assumption for how timing and loss of rebates would impact sales. Given the space they are in (renewable energy), I would also need to know what the projections for raw materials costs are for the essential parts they make in house at their Gigafactories (ex. are the 21700s they make INR, IMR, IFR, ICR, NCA, or NCO, because the required materials that go into them can greatly drive OpEx, even if producing them in bulk. INR, for example, requires Lithium, Nickle and Manganese, while something like an ICR uses Cobalt in production which may drive the prices higher). Given the price sensitivity for parts used to build electric vehicles, I can see this being a surprisingly underutilized driver of costs.
I would still use a 5-7 year projection window, as I think you'll hit capacity during that time for the Model 3, but again, much of it is driven by how much Tesla can actually get off the ground running. I mentioned before about putting a comps table together too, to show comparison against other Auto companies because Tesla is a car company, and any other industry you want to compare it against.
Can I ask what job you have? That was a really good analysis
Amazing analysis
I pretty much agree with this valuation.
I doubt the hard assets are worth much more than the debt so valuing the company at zero makes sense.
The $60 billion equity value is nearly entirely musk. If you notice one thing about investing the market often value companies based on what worked last cycle.
Bezos and Jobs worked out. Even if the valuations didn’t always look great. Therefore musks gets a nice valuation because betting on genius last cycle paid.
Honestly, I think that the Hard Assets should be worth at least the value of the debt, even considering depreciation, as they can be sold off for producing other things fairly quickly. Mind you, the NUMMI factory that Tesla uses went unused for years before Tesla bought it. So I honestly believe that the hard assets can be recouped, even in today's market for more than expected. The factories can be repurposed for other cars and the battery plant, well, can produce tons of non-21700 batteries quickly too.
So the recoup on them should be nice, but then again, based on P/BV, it's clear that the debt is greater than the Book Value. The Book Value on the assets somewhere around 3.8/3.9 Bln. Figure with a P/BV of 13.17 and a Market Price of 301.66/Share, that's 22.95/Share in Book Value. At ~170MM outstanding, that's the 3.8/3.9 valuation right there.
Oh, I agree that the majority of the valuation is all Musk. This is why I hate tech companies that rely on the cult of personality and can't back it up. As much as management is important, the question is "Can a company survive if the visionary is no longer there?" I mean, Apple is a great case study in this - as Jobs had two stints with the company, nearly driving it into the ground the first time and reinventing it the second time. Apple survived both experiences without its visionary leader. Bezos... he worked out well leading Amazon, but everyone forgets that Amazon was one of the few online retailers that survived the Tech Crash. That's a huge point to remember, so when you're the last one standing early on, it's easier to overcome when your competition is wiped out.
Then again, I think the $60Bln isn't a reflection of the past, but a reflection of the fact that there is this expectation that Venture-Backed Unicorns, or people who are linked to Venture-Backed Unicorns, can deliver the magic. So Musk's ties to Paypal, his various investments in companies that were bought out, etc., make him the perfect image of "successful visionary". People buy the image, not the expectation of what worked last cycle.
Excellent analysis. I think, however, that at its core, Tesla really is a battery company, and not so much a car company. I say based on the fact that what really makes Tesla stand apart is that it's electric. Aside from R&D now spent on their automated driving, you can note that Tesla spends a considerable amount of cash on designing and building new batteries. Note how their batteries are made in-house. A glance at their recent (ish) 10-Q will show that energy generation and storage still make up a considerable amount of their revenue as well. Obviously, you've already mentioned a lot about the OpEx associated with producing batteries, and have done quite an extraordinary job on your analysis.
I don't think the fact that its electric really differentiates Tesla from anyone else at this point. 5 Years ago, that was the case, but with BMW, Chevy, Fiat, Ford, Kia, Mercedes Benz, Mitsubishi and Nissan all releasing full EV cars in the US, I think the argument there becomes moot. This doesn't include Europe, which has had a greater push for EV cars for longer. If Tesla didn't have the production problems it was plagued with (again, owing to it believing it wasn't a manufacturing company), it would clearly have the advantage as an electric company. It's shift to produce batteries in-house doesn't make it a battery company though.
I could argue that, at its core, Tesla is an alternative energy company or an automotive company, but not a battery company. Remember, Telsa's initial models were built using 18650s sourced from Panasonic/Sanyo. They could have equally been sourced from LG Chem (LG's Battery Division), Samsung SGI (Samsung's Battery Division) or Sony EDC (Sony's Battery Division). Those are the Big 4 in batteries. The introduction of the 21700 and 20700 cells was meant to improve battery life and performance. The issue here, however, is that for Tesla to be considered a battery company, they need to have a significant non-Tesla/non-Solar City distribution network to meet the demand for battery sales. Plus, when you consider that Tesla would become the largest consumer of Panasonic/Sanyo batteries, it makes sense they develop in-house capabilities. I mean, it poses its own series of OpEx and CapEx problems, but that's a different story.
100% agree it’s a battery company based on valuation.
You can’t get a $70 billion valuation on a car company. The margins are too low once you try for mass market.
A further issue for Tesla is the autonomous car should eventually shrink market size.
To justify their valuation you have to believe Tesla is “not” car company.
What did you say?
Is Tesla cash flow positive? I don't know how a DCF would help you there if they aren't.
To be honest, you could make a good argument for EV/Rev. Or you could be pessimistic and go sum of the parts.
Build a TAM model with an assumption of market share. Defend the mkt sh number then put it in context with how much capex it would take to build thise gigafactories then realize all of that is useless cause they'll be BK by March next year
How secure is the bag (funding)?
Add up the value of each and every Tesla automobile and you have your answer.
Capitalize R&D
about three fiddy
Easy, whatever the bigger fool than you is willing to pay.
Fundamentals and comps are out the window with this sham of a company. How do you take a comp on a negative EBITDA!?
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