I think it is very likely that we see several more rounds of capital raises before 2023. Just because Elon said there is no need doesn't make it so. While I like TSLA and want it to succeed, there are some facts that cannot be ignored. They need $1B+ for GEN III R&D. That is going to involve another cap raise for sure, no way that TSLA will have that much profits from Model S and Model X in 3 years. Furthermore, in order to keep growing, they need batteries. Yea sure Samsung and Panasonic can make giga-factories, but this is a very low probability event. TSLA will have to accelerate the process one way or another. Add to that additional costs for marketing, charging technology, other R&D costs, legal fees and a number of other expenses that companies face as they get bigger, and you quickly realize that over the next decade TSLA may need $2-3B in cash to grow. I'm not saying this is a bad thing, but it definitely leads to share dilution. The markets won't be as generous to Elon & company every time that the price pops 5% when they announce a $1B offering.
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If we take your $2-3B number, that represents at most 15% of Tesla's current market cap... thus 15% more shares. The numbers the guy from NYU put in imply a 4-fold dilution of Tesla's stock. Just completely out of scale... his whole analysis massively skewed.
(as an aside, I don't think they'll need that much cash. they have $1 billion now, and I see them earning roughly another billion between now and Gen III ($1.50, $3, and $7/year in the next 3 years). That should be enough to pay for Gen III rollout. $20+ eps is reasonable from 500K+ cars... this will fund next step of growth.)
ModelS8794
Member
The model doesn't spit out a market cap in year 10 and then work back. Instead, it spits out free cash flow in years 1-10 (and then a 'terminal value' which is in essence a measure of free cash flow in perpetuity from year 11 onward.) And it then discounts those FCF figures back to the current year. This is a "discounted cash flow model".
The simplest way to answer your question of what his model suggests the firm will be worth in 10 years, is to take his discount rate and assume that is the return on the shares from his current 'fair value'. If you did that, you would (coincidentally) get to $165 per share in year 10. Or more specifically, $165 per share in today's shares, understanding that the actual market cap in year 10 will be much higher but will only be possible with a massive amount of reinvestment in the firm that can only come through share dilution.
As to why a company with Audi's revenue and Porsche's margin would have sub-Audi mkt cap today, I think the answer lies in the reinvestment and ROIC implications of the model. According to his model, to get to that $62 billion in 2023 sales, $47 billion must be invested into the business over the next 10 years. And since the model only has Tesla earning a cumulative $26 billion in operating income over those 10 years (with basically all of it coming in the last 4 years) the rest of it will have to come from stock (and bond) offerings that will dilute share count and make the firm value 10 years hence substantially larger, but not to the benefit of today's shareholders.
this is why i believe the interesting aspects of this exercise lie in figuring out to what extent Tesla may buck the trend of the industry in its ability to produce excess profits on the back of competitive advantages rather than low-return capital intensive PP&E.
Norbert
TSLA will win
This may be a side issue, but that would suggest it would be cheaper to buy Audi ($35 billion).
Norbert
TSLA will win
Thanks for the description. On TV he used sentences like this:
That sentence, at least to me, would (still) sound as if referring to the achievable market cap. Depending on how you interpret the ambiguous "you still end up with": Starting with the present and "ending up" in the future (like most people), or starting in the future and ending up in the present (like him). That's a surprising overlap of meanings, there.
If the model doesn't say what the market cap in 10 years is implied to be, or exactly which percentage of eventual dilution is implied, if the model doesn't output any of these things, how then do you gauge whether the numbers, which it produces, make sense in the real world?
I don't think Tesla/Elon will need $47 billion to get there. How would they? And maybe less than 10 years as well.
Causalien
Prime 8 ball Oracle
Why would you need $47 billion? That's a big number. Aluminium/carbon fiber for 100k car Let's say 2x current production line at double shift. Amount of worker wage/hour x4 + 25% benefits So what if they max out laptop lithium battery inventory. Stock and buy them all up secretly like AAPL did with SSD supplies and force every other manufacturer to buy at higher price. I doubt the cost of the above is $47billion. You only need 1 year of operation to become profitable. After this, the line feeds itself.
Agreed, $47 billion is way off scale of what they'll need to invest in plant/equipment to get up to 1.5 million or so cars that would bring in the kind of revenue he is talking about. I did a back of the napkin estimate extrapolating from the billion or so they've talked about spending to get Gen III going (+ cost land, & construction for 2 more plants each capable of 500K/year production), and perhaps as much as $10 billion needed by 2025 or so when they might hit 1.5 million cars. Nothing near $47 billion.
It's simply an analysis that got some headline play with the $67 number, highlighted some bullish assumptions up front, but buried some far out of scale bearish assumptions that resulted in the low valuation.
The professor is simply wrong.
Comparing Tesla with Audi and Porsche doesn't make sense at all. Why?
1.Both Audi and Porsche have tons of competitors while TSLA is ahead of its competition at least 5 years.
2. None of them have changed the world. Audi and Porsche are just insignificant niche players in the auto industry. Historically, Ford, GM, Toyota are far more important players than Audi and Porsche.
I believe that Tesla will disrupt the auto industry and achieve gross margin of >40% and profit margin of 25%. I bought TSLA stock and calls early this year, so far, my stock is up+400% and calls are up 60 times.
Comparing Tesla with Audi and Porsche doesn't make sense at all. Why?
1.Both Audi and Porsche have tons of competitors while TSLA is ahead of its competition at least 5 years.
2. None of them have changed the world. Audi and Porsche are just insignificant niche players in the auto industry. Historically, Ford, GM, Toyota are far more important players than Audi and Porsche.
I believe that Tesla will disrupt the auto industry and achieve gross margin of >40% and profit margin of 25%. I bought TSLA stock and calls early this year, so far, my stock is up+400% and calls are up 60 times.
As I noted in comments to his article, his capex estimates are way off -- way too high. He's not using the correct comparisons.
Capital investment for Tesla should be somewhere between that of a car company (for the shells / stampings / etc) and an electrical supply company (for everything else). Scaling up production for Tesla is far less capital-intensive than for an ICE manufacturer. ICEs are complicated and use lots of unique parts.
If they purchase another plant or two over the next 10 years, which they will likely need, it will take hundreds of millions for the purchase and tool-up of those factories. Tooling up is not cheap. Those new robots in the Fremont plant are not cheap.
The Fremont plant was producing 500,000 cars a year when it was run by NUMMI. If Tesla has to "purchase another plant or two", Tesla will have somehow become a huge automaker and *that alone* will justify the current valuation.
That is extremely unlikely to happen soon.
Tesla may have to set up a second production line soon, but that's a much smaller scale of purchase...
Tesla bought an astounding amount of equipment second hand for extremely good prices when it set up the Tesla Factory. Here's the thing: there is more of that equipment available to buy from shuttered auto factories in Detroit. Tesla can still get discount equipment, and it's proven that it can find it and get it cheap.
Maybe when Tesla is setting up its fifth or sixth production line, it will have run out of cheap equipment to buy. But that's a while from now...
Although NUUMI used to run 500,000 cars annually, it relied on a lot of outsourced production of components and subassemblies that Tesla now builds on site. Given Tesla's productions processes, I would be surprised if they could produce more than 200,000 cars annually there (swag).
Blog Tesla valuation from professor Damodaran at NYU.
Not sure if this has been posted yet but here is an Interesting blog post regarding tesla valuation from professor Damodaran at NYU.
Fair and balanced.
Musings on Markets: Return to the firing line: Revisiting Tesla and hopefully living to tell the tale!
Not sure if this has been posted yet but here is an Interesting blog post regarding tesla valuation from professor Damodaran at NYU.
Fair and balanced.
Musings on Markets: Return to the firing line: Revisiting Tesla and hopefully living to tell the tale!
Professor is at it again, both on his blog and seeking alpha article. he's upped his valuation from $66 to $115-120. I replied without any kid gloves in both,
Blogger: Musings on Markets - Post a Comment
Tesla Motors Inc (TSLA) news: Return To The Firing Line: Revisiting Tesla - Seeking Alpha
Blogger: Musings on Markets - Post a Comment
Tesla Motors Inc (TSLA) news: Return To The Firing Line: Revisiting Tesla - Seeking Alpha
Double, there was a thread on this from his earlier blogs. fwiw, I find his thesis neither fair nor balanced, and I commented as such on his blog. he wrote a smoke and mirrors reply to my comment which I've just responded to.
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