3 Year Tesla Valuation Model

[dennis]

We've heard Ron Baron talk about Tesla returning 30x-50x and Elon talk about a $1T market cap, larger than Apple. But I haven't seen any valuation models here, other than the ones done by the WS analysts which are way less aggressive than what Tesla plans to achieve. Does it make sense for us to build a crowd-source model for what TSLA might be worth in 2019? I ask this because when I did a very simplistic one I was surprised at how much potential there is for Tesla stock in a 3 year time period.

I offer up my ultra-unsophisticated model as a starting point:

2016: $8B in total revenue
2019: 500,000 cars * $55K ASP = $27.5B in automotive revenue + $5.5B for TE and Solar = $33B total revenue
CAGR: 60%
After tax margin: 2.5% (same as Amazon)
2019 Earnings: $825M

Tesla is targeting 500K deliveries in 2018, so the 2019 automotive estimate is not overly aggressive. The revenue estimates for TE and Solar are a total SWAG. They could potentially be 2x this in 2019 based on what Elon has said. What about earnings? Is 2.5% after tax margin overly conservative. You would think so

Now let's try to find a comparable company. The most obvious to me is Amazon, who is a clear market leader in multiple segments and a technology based company disrupting formerly low margin businesses.

2013: $74B in total revenue
2016E: $108B
CAGR: 13%
Last 4Q earnings: $2.1B
Market Cap: $358B
Price/Sales: 3.3
P/E: 173

It Tesla grows to $33B in revenue in 2019, given the 60% CAGR assigning a P/S ratio of 3 is very conservative. Assigning the same earnings multiple to Tesla as what the market is giving Amazon is also not aggressive, especially since Amazon's P/E is now at a historic low. Here's how that works out:

$33B sales * 3 P/S = $99B
$825M earnings * 173 P/E = $143B

These numbers look way too good, don't they? But the financial assumptions I have used seem conservative to me if Tesla comes even close to achieving its planned Model 3 and TE revenue ramp. It would be great if others here could poke holes in my assumptions and/or help to build a more sophisticated model. The more confident we become in Tesla's valuation prospects in 2019 the more confident we can be in adding to our long positions.

 

[EinSV]

@dennis, glad you put this together -- several members have been suggesting starting a valuation thread for a while now.

Your numbers look reasonable to me, although I think they may turn out to be conservative. I have put together models for my own investing decisions based on projected sales in 2020 rather than 2019, but can make some adjustments to make it work for 2019.

For the automotive business, my estimate is based on Tesla's guidance of 1M cars in 2020, 800K 3/Y and 200K S/X, 27.5% GM for S/X, 22.5% for 3/Y, ASPs of 87.5 for S/X and 45 for 3/Y (these are conservative IMO). Although I recognize I am in the minority, I believe Tesla is likely to meet its 1M vehicle in 2020 goal, and in fact is more likely to substantially exceed that goal than to fall short of it. So I prefer to stick with what I think is a reasonable estimate for valuation purposes.

In addition, I think the assumption that Model S/X sales will peak any time soon is very likely to turn out to be wrong so I am sticking with my estimate of 200,000 vehicles. There is not space here to discuss but I explain my thinking in post #51 in the "Prediction" thread: Prediction Thread - "You Called It"

The numbers above result in the following for TA in 2020:

Revenue: $53.5B
GM: $12.9B

With these figures, I estimate $5.4B in OpEx, $100M in interest and a 22% tax rate resulting in earnings of $5.8B.

Since Tesla should still be growing at 60% per year or more and have penetrated only a small portion of the market, a P/E of 40 seems reasonable if not conservative. This results in a market cap of $231B for the automotive business.

TE is much harder to estimate since we know little about growth rates or margins. Elon has said that he expects TE will eventually be about the same size as TA and will grow much faster. But we don't yet know how quickly it will ramp, how quickly Tesla will be able to build the multiple Gigafactories necessary to build sufficient production or what margins will be.

Assuming what I think will turn out to be a conservative $2B TE revenue in 2017 and 80% CAGR (higher than the automotive business but not by much) results in 2020 TE revenue of $11.6B. I believe this will very likely turn out to be too low. Assuming GM of 22.5% (which I believe is conservative) results in GP of $2.574B. Estimating OpEx at $1.2B, $25M in interest and 22% tax rate results in another $1.0B in earnings. Applying the same P/E of 40 (low for a company growing this fast) results in an additional market cap of $40B.

I have not done any projections for Tesla Solar, so for sake of simplicity and as a conservative element will estimate a market cap of $2B.

Tesla Network, Tesla Semi and Tesla Minibus are also likely to contribute substantial value by 2020 but will ignore them for present purposes.

So total market cap is $231B+$40B+$2B=$273B. Discounting 10% to 2019 results in a valuation of $245.7B.

After the SCTY merger I believe there will be approximately 163M shares outstanding (149M X 1.091). Assuming 7% additional dilution per year for cap raises, option exercises and other stock based compensation, convertible bond conversions not paid in cash, equals 200M shares outstanding at the end of 2019, or a share price of $1228.

Obviously, this would be a very nice number. I would expect that as time goes on and TE ramps and Tesla Network, Tesla Semi and Tesla Minibus come online it is more likely that this number will go up rather than down.

I should be clear that I am not predicting the share price will be this high in 2019 (or 2020). A major countervailing factor that needs to be taken into consideration is that Tesla is disrupting multiple powerful industries. The resulting PR/FUD campaign therefore may continue even after Model 3 launches successfully and profitably, and even if TE and Tesla Solar surpass the market's expectations. In addition, as long as Tesla is growing 60-80% per year, the capital investment, R&D and other expenses associated with growing the business will mask the underlying profitability of its core businesses, and provide ammunition to naysayers. The effect should lessen after Model 3, but it may not go away entirely. As a long-term investor, I will take 60-80% growth over short term profits any time, although that may mean that Tesla SP may not realize its full potential for a while yet.