Long-Term Fundamentals of Tesla Motors (TSLA)

[Words of HABIT]

Fun With Numbers

The contributors at TMC are awesome. Always a good read guys.
My guesstimate for Tesla is not as high as Sleepyhead, but here goes. All comments are appreciated, as this is my first attempt and I learn something new every day.
The simple spreadsheet below shows how Tesla can generate >$9B in Gross Profit on selling >600 thousand cars by 2020 while capturing less than 1% of the global auto market share. * Gross Margin excludes ZEV credits. The EV Revolution will not happen over night. Exponential growth figures really start to kick in after 2020. It will get really fun then. Time is on our side (just ask Shell). I believe.

 

[sleepyhead]

The only argument you have raised against DCF remains sensitivity to assumptions, which as described above is also a property of P/E and other ratios. This is actually quite obvious - you can't get around "garbage in, garbage out".

It is nice that ratios work for you, but I do not find your arguments against DCF convincing at all. In any case, there is no reason to impose One Right Valuation Method on the forum. I will feel free to critique assumptions made in your ratio analyses, and I welcome critique of my assumptions for a DCF. All in mutual respect.

DCF: Less than 0.01% of investors know how to create a DCF
My method: more than 99.9% of investors can use it

DCF: Takes several hours to create
My method: took me less than 5 minutes

DCF: finds a fair value of today's stock price
My method: tries to see where the stock price is headed, so that you can make informed decisions.

Other than that, both methods are garbage in/garbage out.

It's just that my method is significantly better because anybody can use it and anybody can understand it.

I worked for the top ranked research shop and I can tell you that DCF's are useless; I already explained how analysts use DCF's. The only reason companies use them, that I can think of, is to protect themselves. If they lose a lot of money or give bad advice, they can show that they did all of the analysis.

In the time it takes you to create a DCF, I can research a dozen different companies and potentially find the next great investment, while you are plugging away at your 7% discount rate; and wondering whether you should have used a 6% or maybe 8% instead.

If you guys want to make money in the markets the read a lot, and then read some more. Don't be sitting in spreadsheets all day, that is wasting precious time that could be spent on reading. Read, research, look at financials, charts, and then read some more.

Use your time wisely.

 

[RationalOptimist]

'The simple spreadsheet below shows how Tesla can generate >$9B in Revenue on selling >600 thousand cars by 2020"

Um, I could be misunderstanding you, but I think that's not $9b in revenue, but $9b in gross margin that you're calculating.... Which is a good thing, because some of those sales guesses are pretty optimistic.

 

[gym7rjm]

The contributors at TMC are awesome. Always a good read guys.
My guesstimate for Tesla is not as high as Sleepyhead, but here goes. All comments are appreciated, as this is my first attempt and I learn something new every day.
The simple spreadsheet below shows how Tesla can generate >$9B in Revenue on selling >600 thousand cars by 2020 while capturing less than 1% of the global auto market share. * Gross Margin excludes ZEV credits. The EV Revolution will not happen over night. Exponential growth figures really start to kick in after 2020. It will get really fun then. Time is on our side (just ask Shell). I believe.

It's fun to make assumptions about future products, and it's a good exercise to see where things could go, however, it is difficult to make accurate predictions because there are so many factors that could change from now until the product is released.

But since the Model S has been selling for a bit we at least have some metric to go by to predict future trends. So considering your chart for the Model S, I think the average unit price is way too low. The Model S will be released in China starting in 2014 and so far reports are showing it to start at 1M rmb ($163k usd), so going forward there will be a large chunk of MS cars (depending on demand in China) that will be selling well over 100k. We will also see the roll out of more options and add ons that will add up. And also, lets not discount inflation over time. I'm not sure what this all calculates out to, but low 80's just seems way to low to me, and I would expect that to trend higher over time, not lower.

In the way of gross margin, I think 40% gross margin is very optimistic. Not saying it can't be done, but I want to see how gross margin changes over the course of 2014 before I judge how high it can go. I would be very happy with anything over 30%.

Thanks for the great chart, will be fun to come back to our guesses in the future to see how it goes.

 

[Words of HABIT]

'The simple spreadsheet below shows how Tesla can generate >$9B in Revenue on selling >600 thousand cars by 2020"

Um, I could be misunderstanding you, but I think that's not $9b in revenue, but $9b in gross margin that you're calculating.... Which is a good thing, because some of those sales guesses are pretty optimistic.

Correct and thank you. I edited my original post.
Best,
Words of HABIT

 

[lolachampcar]

Words,

I believe demand for G3 will be much higher than the production numbers you show. If Tesla can supply and ramp to meet demand, I believe you will see much more aggressive deliveries.

 

[Bgarret]

I'm not entirely sure Elon envisions a slow buildup of Gen 3. Keep in mind he has a standing bet that half of car production will be EV by 2030. And we all know by this point not to bet against Elon.

2014 production numbers will be very telling on the company's ability to scale up as they "test the depth of MS demand." Next, the roll out of the Model X will show how well they learned from the MS launch. Which I expect will scale up much more quickly and smoothly. If we look back at the Roadster days, no one could have predicted that Tesla could go from niche specialty car maker to legitimate mass production car company so quickly. Part of Elon's strength is his ability to make amazing business decisions at opportune times, which is not luck, but his ability to "play chess in 3D," as others have put. The last secondary offering was basically conjuring up cash magically, it was incredibly brilliant the way it was done. So, while many of the hurdles on the gen3 path seem insurmountable, I won't be surprised to see several more brilliant/unforeseeable business decisions up Elon's sleeve.

Thanks for everyone's posts - it's a little refreshing to come back to the long-term thread after spending maybe a little too much time on the short-term and debt ceiling threads.

I could have included a bunch of the preceding posts, but the 3d chess comment resonated. What happens to projections and cash flow if everything is moved up 6 months?

When Model X was postponed:
1) Cars were coming off the line at about 200/wk,
2) There was a reservation list, but not a good idea of demand in the US, much less the rest of the world,
3) There were significant challenges with the supply chain to produce more cars,
4) TESLA not only had a negative balance sheet with $225 million in cash and $460 million in debt, they had negative gross margins on the cars they were producing....etc, etc. etc. They would have been fools to stay with their proposed 2013 rollout of X.

Contrast that to now:
1) Cars coming off the line at 7-800/week or 38-42k/year (as per Craig cfOH) - in the Q2 conference call Elon said they were going to solve the supply chain problems by Q1 or Q2 of 2014...I think he was sandbagging and they are, for the most part, solved - including the good information in previous posts about battery production coming online for 50-80k per year.)
2) Very good feel for demand in US and better feel for demand in Europe and Asia - I believe Elon is supply, not demand constrained. 42k of Model S in 2014 seems doable (with some reports of a goal of 51k).
3) A positive balance sheet, with over $750 million in cash, profitable quarters, approaching 25% margins and the potential to reduce some of the outstanding $460 million of debt if some of the convertible bondholders convert to stock - (note: the bond trading activity for the convertible bonds looks to be between 20-50% less than before the conversion date (http://finra-markets.morningstar.co...93595&startdate=09/02/2012&enddate=09/02/2013). Increased Brand recognition, new stores, free marketing, supercharger rollout, experience with global deliveries, etc. etc.

Which gets me back to the 3d chess. I think Elon et al were prudent to delay Model X rollout until "late" 2014 in March of this year. Barring some engineering challenge, I think they would be fools not to accelerate the rollout to "early" or "mid" 2014 as part of their guidance for 2014. I think when Elon is talking about production rates, margin and supply chain, he is solving for S + X, while the analysts believe he is solving for S. If it is solving for S + X then that = $ for shareholders as a "mid" 2014 rollout would potentially mean 42,000 S + 10 - 15,000 X =52-57k production for 2014 and a bigger lever to move the logistics, plants, supply chain, etc for gen3.

Fun to think about....

 

[Steve NH]

Words,

I believe demand for G3 will be much higher than the production numbers you show. If Tesla can supply and ramp to meet demand, I believe you will see much more aggressive deliveries.

Agreed here..
I am an average mid income household - already committed to Gen 3
Have had a discussion with a few others - and after checking out Tesla - they too are committed to Gen 3 as soon as it hits market.

The average person (Like me) currently has no clue what Tesla is all about...The few that do think it is a $ 90,000.00 car - out of their reach
(I knew nothing about Tesla 3 months ago)
Once the average consumer gets educated - they will be lining up in droves for the Gen 3...
All the Camry, Accord, Mazda 6 people will have to seriously consider the Tesla

Production will be the limiting factor.

Just my 2 cents

 

[austinEV]

Fun to think about....

Very fun indeed...

 

[DonPedro]

DCF: Less than 0.01% of investors know how to create a DCF
My method: more than 99.9% of investors can use it

DCF: Takes several hours to create
My method: took me less than 5 minutes

None of these points are in any contradiction to my proposition, which is that a properly done DCF is valuable. And I would say that 99.9% of investors have no idea what they are doing when they use a P/E, either (as evidenced by a gazillion "short TSLA" articles on Seeking Alpha).

DCF: finds a fair value of today's stock price
My method: tries to see where the stock price is headed, so that you can make informed decisions.

I really don't see this point. Both are valuation methods, so they are doing the same. The difference is that ratios depend on heuristics while DCF depends on detailed assumptions (both approaches with their very important pitfalls). The only difference in the output is that by using P/Es taken from the current market, you get a market bias (which is what you want for doing a long/short strategy - e.g. long TSLA short TM) - but not necessarily if you are only going to going long without a hedge.

I worked for the top ranked research shop and I can tell you that DCF's are useless; I already explained how analysts use DCF's. The only reason companies use them, that I can think of, is to protect themselves. If they lose a lot of money or give bad advice, they can show that they did all of the analysis.

This is like saying the violin sounds horrible, because you've heard the neighbor's daughter practice. You put a 20-something with some Excel skills to value a company, you get what you deserve.

I think there is a lot to P/E analyses, but the best is to be fluent in many tools. I think the DCF analysis we started the discussion on here contained some interesting assumptions that could potentially be very important to a valuation of TSLA, and that your P/E analyses would completely ignore. Is it really your view that it is irrelevant for Tesla's share price whether the capital requirements for expansion will be $0 or $43bn*), or whether there are 0 or 25 million employee options outstanding? If not, then saying that a P/E is all that matters is to have a big blind spot.

These days I am not interested in other companies than TSLA, so I am happy to spend some time getting my judgments right. If you want to base your decisions on what you can do in a few minutes, that is fine for you. But it is not a good basis for dismissing information.


*) I am not saying I agree with the assumptions of Prof. Damodaran, just pointing out that the P/E analysis more or less assumes that these assumptions don't matter.

- - - Updated - - -

Thanks for everyone's posts - it's a little refreshing to come back to the long-term thread after spending maybe a little too much time on the short-term and debt ceiling threads.

I could have included a bunch of the preceding posts, but the 3d chess comment resonated. What happens to projections and cash flow if everything is moved up 6 months?

When Model X was postponed:
1) Cars were coming off the line at about 200/wk,
2) There was a reservation list, but not a good idea of demand in the US, much less the rest of the world,
3) There were significant challenges with the supply chain to produce more cars,
4) TESLA not only had a negative balance sheet with $225 million in cash and $460 million in debt, they had negative gross margins on the cars they were producing....etc, etc. etc. They would have been fools to stay with their proposed 2013 rollout of X.

Contrast that to now:
1) Cars coming off the line at 7-800/week or 38-42k/year (as per Craig cfOH) - in the Q2 conference call Elon said they were going to solve the supply chain problems by Q1 or Q2 of 2014...I think he was sandbagging and they are, for the most part, solved - including the good information in previous posts about battery production coming online for 50-80k per year.)
2) Very good feel for demand in US and better feel for demand in Europe and Asia - I believe Elon is supply, not demand constrained. 42k of Model S in 2014 seems doable (with some reports of a goal of 51k).
3) A positive balance sheet, with over $750 million in cash, profitable quarters, approaching 25% margins and the potential to reduce some of the outstanding $460 million of debt if some of the convertible bondholders convert to stock - (note: the bond trading activity for the convertible bonds looks to be between 20-50% less than before the conversion date (http://finra-markets.morningstar.co...93595&startdate=09/02/2012&enddate=09/02/2013). Increased Brand recognition, new stores, free marketing, supercharger rollout, experience with global deliveries, etc. etc.

Which gets me back to the 3d chess. I think Elon et al were prudent to delay Model X rollout until "late" 2014 in March of this year. Barring some engineering challenge, I think they would be fools not to accelerate the rollout to "early" or "mid" 2014 as part of their guidance for 2014. I think when Elon is talking about production rates, margin and supply chain, he is solving for S + X, while the analysts believe he is solving for S. If it is solving for S + X then that = $ for shareholders as a "mid" 2014 rollout would potentially mean 42,000 S + 10 - 15,000 X =52-57k production for 2014 and a bigger lever to move the logistics, plants, supply chain, etc for gen3.

Fun to think about....

Very fun. What I am wondering about is how this will be solved for S + X + GenIII (or should we say S + X + E now?).

The paradoxical conclusion (at least on 1st order logic) is that as long as they are production constrained on S + X, they would postpone the GenIII. Think about it - is it more profitable to sell 30k more S/X a year or 30k more GenIII?

I think this is why they don't seem to be in a hurry to develop the GenIII. If they went full steam ahead on it now, they would be ready with it before they would be able to satisfy that extra demand. Better to ramp up only on S+X as long as there is sufficient demand. In the mean time, batteries only get cheaper and superchargers get more numerous, which improves the value proposition for the GenIII.

 

[lolachampcar]

DP,

I think the initial demand for G3 will dwarf S and X. It will be a huge discontinuity in production capacity thus a push one year either way is not important. Irrespective of S and X volume, Telsa will either be prepared for an order of magnitude increase in production or they will not. I think G3 production is directly tied to cell availability and little else.

 

[Robert.Boston]

[post on impact of gov't shutdown was moved to Government Shutdown/Debt Limit - Issues and Timelines for Investors ]

 

[Norbert]

None of these points are in any contradiction to my proposition, which is that a properly done DCF is valuable.

Considering Audi's stock price remained constant the last 2 or 3 years, and assuming it wouldn't grow very much in the next 10 years either, what happens if you apply DCF to it?

 

[DonPedro]

Considering Audi's stock price remained constant the last 2 or 3 years, and assuming it wouldn't grow very much in the next 10 years either, what happens if you apply DCF to it?

I am not quite sure what you are asking here... Could you rephrase your question?

 

[Norbert]

I am not quite sure what you are asking here... Could you rephrase your question?

It seemed to me that one of the assumptions was that Tesla would grow to the size of Audi (with Porsche's margins), and then calculate the future stock price on the assumption that Tesla would just remain at that level, without further expectations of growth. (The scenario that EVs will remain a niche product, more or less).

So I am wondering how this method, in general, evaluates the share price of a company that has a certain level of revenue, but doesn't grow anymore.

 

[Mario Kadastik]

I asked a few pages back, but never got an answer. Does anyone think that the government shutdown also affected Teslas ability to produce/sell cars? Registrations, customs what not. As I've understood a lot of things were standing still during the shutdown and it's a full 2 weeks of Q4. Just curious.

 

[surfside]

I asked a few pages back, but never got an answer. Does anyone think that the government shutdown also affected Teslas ability to produce/sell cars? Registrations, customs what not. As I've understood a lot of things were standing still during the shutdown and it's a full 2 weeks of Q4. Just curious.

not sure about customs and international shipments, but with regard to US registrations, they are run by a state agency (in california it is the DMV), so they were not affected.

surfside

 

[TSLAopt]

Considering Audi's stock price remained constant the last 2 or 3 years, and assuming it wouldn't grow very much in the next 10 years either, what happens if you apply DCF to it?

Yesterday I had a friend who is a long time skeptic break down and tell me he's thinking about getting one and wanted a test drive. I gave him one and he said he's sold and now has to convince his wife (sounded like me in summer 2012 when I first test drove it).

Today, brought it to the car wash...an old lady comes up to me when I'm about to get in after they dry it and tells me her friend just got one this week and she's excited to test drive her friend's car this weekend. She has a hybrid Lexus SUV and I told her she's going to get one once she test drives the S...she agreed because it looks so nice...but I told her it looks nice but the drive is what will sell her, she said she knows because of her hybrid SUV smooth driving...I just chuckled inside knowing its not even close.

these are everyday examples of excitement that can't be quantified in DCF...probably not in any spreadsheet either...basically as many cars as Tesla can produce I believe they will sell for the foreseeable future. There's at least a 3-5 year headstart in batter technology Tesla has here and by the tme someone catches up Tesla will be a generation of technology ahead of them. They can even increase the price further if they'd like to squeeze more margins if need be.

 

[Robert.Boston]

It seemed to me that one of the assumptions was that Tesla would grow to the size of Audi (with Porsche's margins), and then calculate the future stock price on the assumption that Tesla would just remain at that level, without further expectations of growth. (The scenario that EVs will remain a niche product, more or less).

So I am wondering how this method, in general, evaluates the share price of a company that has a certain level of revenue, but doesn't grow anymore.

The DCF approach is even better with stable companies than with growth companies (or depending on your POV, is less unreliable for mature companies). DCF is premised on the efficient market hypothesis that a company's value today is equal to the expected value of future cash flows. With a stable company, the assumptions needed to estimate future cash flows are less heroic. Also, because one applies a discount factor to future earnings, the flat profile of a mature company's earnings doesn't depend as much on the discount rate you apply (which, properly considered, should include risk factors, which are also hard to estimate).

Long and the short of this: I think a DCF model for valuing Audi stock is reasonable, but not so for TSLA.

 

[Norbert]

Long and the short of this: I think a DCF model for valuing Audi stock is reasonable, but not so for TSLA.

It seems to me, trying to understand this, that in addition, if you compare the DCF value to an ordinary stock price, you would be comparing apples to oranges. Under the assumption that Audi's revenue remains constant in the future, the DCF value of its stock price would probably be much lower than the actual stock price. Meaning, if I understand this correctly, that the DCF value is much lower than the prices one might compare it to (if one doesn't know it is a DCF value). One might discount the value twice, if you follow my thought. A percentage of 10% per year was mentioned, which to me suggests that DCF "prices in" a certain growth factor (and one might not be aware of that). If that is the case, and one hears the DCF value of a theoretical company with constant revenue, one would think its price will go down, whereas in reality, it might remain constant.