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Valuing Tesla as a Private Company

Discussion in 'TSLA Investor Discussions' started by jhm, Aug 9, 2018.

  1. jhm

    jhm Well-Known Member

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    Let's have a thread where we focus on how to value Tesla as a private company. Questions of interest include:

    Is Tesla more valuable as a private company than as a public one?

    How does going public increase value for equity investors?

    How can we quantify the difference in valuation?

    What determines the value of a private share?

    When does Tesla re-IPO and at what price?
     
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  2. jhm

    jhm Well-Known Member

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    Copied from Market Action...

    All this guesswork about how many current shareholders will convert to private shareholders is fine, but let's not overlook the value of private shares. It's not the $420 cash out value that is critical, but the value of private shares that will animate this deal.

    So let's start from the end and work backwards. Here's my view. Tesla will re-IPO after or as Elon completes the requirements for his CEO package. Indeed, a key motivation for Musk to take Tesla private is to derisk and hasten the time it takes to get to a $650B market cap (under private company valuation). Under the re-IPO this conservatively valued $650B company could fetch upwards of $1T. It will have massive scale, market share, brand power, profitability, massive cash flow, and will still have lots of growth upside. So the re-IPO could be glorious. So let's say in 2027 Tesla is worth $650B to $1000B on some 166M shares (they buy a few back). Thus, we have $3900 per private share up to $6000 per public share in 2027.

    So what would you pay for one of these private shares this year? Personally I think $525 per private share is a good price. This implies a 25% annualized rate of return over the next 9 years on private shares or up to 31%/y return on re-IPO shares.

    The buyout price $420 is 20% below this $525 value. So that is a real favorable price for buying out reluctant public shareholders. It should not be hard for a private investor who shares this view to promise to put up the cash for the buyout. But once it becomes clear that the transaction is on, they have a tremendous opportunity to scoop up public shares as low as $350, 20% below the $420 buyout price. Moreover, many other investors might also realize that they too see huge value in the private shares. Thus, future private shareholder will buy up common shares well before the conversion date. If there is some 30M shares that need to cashed out, they could be obtained is low as $350 or $10.5B well below the value of $525 per private share, or $15.75B. That is, private investors can acquire the shares they want in range of $350 to $525 per share. Likewise, shareholder who chose not to go private can cash out anywhere in this range, but need not accept a price any lower than $420. Even if there were no shorts to squeeze (and there are 35M shares worth of them), this transaction could generate an equilibrium price as high as $525. It all depends on just how much demand there is for private shares. Throwing desperate shorts into the mix can add a certain pop to the whole thing, but it doesn't really change the equilibrium going into the consummation of the transaction. It also does not really matter if the cash out price is raised. It could go as high as the equilibrium and not really change the equilibrium price.

    The ultimate value of a common share depends on the value of the private share and how well investors see that value. Even those shareholders who will cash out some or all of their common shares will want to focus on the value of the private share and encourage others to recognize that value. If that value be $525 as I think it is, then holdout for that price.

    As I discussed this matter with coworkers today, I could tell that many of them were waking up to the idea that holding private shares could be a great investment, better than the much maligned common shares. People still want to buy into the dream, butthey have been turned off by the nightmare sheetshow that the stock has been put through. A fresh start with a lower profile could really breathe new life into holding equity in Tesla. I think it will help a lot to get a private prospectus out, so potential private investors can take a serious look.

    I am optimistic that there will be ample demand, just as there is for the Model 3.
     
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  3. adiggs

    adiggs Active Member

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    When you put it this way, my first thought is "where the heck do you get a 25% annualized rate of return" as an alternative to compare to this? :)

    My second thought is to go figure out how much of my current net worth I can live with reduced access to for 10 years, and go buy buy buy.


    Some interesting new thoughts for me - thank you @jhm. My primary reaction to this go-private scenario is just reinforced - I really like the idea of private Tesla AND the $420 price is an underpay.

    And we need actual details of how this would work - the conversion, the periodic liquidity events, does Elon actually carry on with his existing compensation plan (or does it change - I prefer it stay in place with no change).
     
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  4. Seesaw

    Seesaw Member

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    Is there potential for other benefits as private owners like discounted cars or pre-launch events? Doubt it, but would be a pretty cool bonus.
     
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  5. adiggs

    adiggs Active Member

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    The potential exists of course - the company can do anything like this they want to. The closest they've done to-date is to make Model 3 available to SpaceX and Tesla employees first, and not at a discount. Considering how often Elon's talked about that, I expect that to remain the company standard - investors / shareholders will continue paying full price for the products just like everybody else.
     
  6. jhm

    jhm Well-Known Member

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    #6 jhm, Aug 10, 2018
    Last edited: Aug 10, 2018
    Lending | Loans for Option Exercise | Loans for Liquidity | SharesPost

    I would recommend looking at this website. SharesPost makes money by lending against private investment. They claim this is a way to access liquidity at lower cost and lower taxes. They also provide useful information on private investing.

    [​IMG]

    For many of us contemplating going private with Tesla, liquidity may be a big concern. For me, I will convert most of my shares to private, but questions about how to access liquidity when needed cause me to hesitate on just how many shares to convert or even to buy more shares now. So it is nice to know what some of the workarounds are.

    Common shares of Tesla were also of dubious liquidity value. Sure, you can cash out anytime, but you really hope you don't need cash when the stock price is really beaten up, which was all to often. Moreover, because the stock price is so volatile, it really is not so good as collateral for a loan. Basically market volatility and vulnerability to shorting has swamp what liquidity value there has been on common shares.

    Private shares should have a more stable value clearly linked to the performance of Tesla. This dampens market volatility and vulnerability to shorts. A more stable asset value improves their value as collateral. Thus, liquidity via lending could prove capital efficient, providing potentially better liquidity at lower cost than holding public shares.

    Musk himself would be very sensitive to this. He often borrows against his shares. He would be in a position to know the collateral quality difference between borrowing agains shares of Tesla or shares of SpaceX. He might actually be motivated in part to take Tesla private so as to improve the value of his shares as collateral.

    I don't know enough about this private equity space to know how things really shake out. So mostly I'm just posting this here as a question to stimulate discussion and discovery. Is liquidity via borrowing against privat Tesla shares as good as the liquidity of holding public shares?
     
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  7. durkie

    durkie Member

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    Any idea what their interest rates are? IB lets you borrow at like 2.5% and below.
     
  8. GeorgeSymonds

    GeorgeSymonds Member

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    Take a 60B company - assume its worth 600B in 10 years and then float it again for $1T - which ever way you look at it the share holding is going to give a great return if that happened,

    Question is - will it become a 600B company given its not particularly out performing the nasdaq for the last few years? Lets not also forget Musk owns 22% of Tesla so he'd be worth 220B before the benefits package if this happened on Tesla holdings alone - and overall he'd be worth nearly twice that of Bezos. I'm not sure that passes my sniff test
     
  9. jhm

    jhm Well-Known Member

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    Tesla has track record of growing revenue by 50% each year. This takes long term vision, planning and execution on that vision to pull off. Wall Street rewards quarterly numbers and short term payoffs, not strategic vision. Tesla is positioned to keep growing at about 50% each year for the ten years. That is how they get to about $700B in revenue by 2027. Profitability and positive cashflow are a means to sustaining that growth, so that is part of the plan too. So as private company, Tesla will focus on executing this vision without distraction from Wall Street.

    You might also consider how well SpaceX has grown as a private company under Musk's strategic leadership.
    Space Exploration Technologies | Invest or Sell Shares | SharesPost
     
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  10. GeorgeSymonds

    GeorgeSymonds Member

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    #10 GeorgeSymonds, Aug 12, 2018
    Last edited: Aug 12, 2018
    You’re still not getting how stock markets work. Price is to a large part based on potential, Teslas 60b valuation, similar to Ford and GM is because in 10 years they’ll be as big in terms of revenue as those companies. Doubling revenue doesn’t double the market valuation if it’s expected.

    As an example, Teslas share price is about 40% up over the last 3 years but revenue is up quite considerably from 1.2b to 4b (15q2 to 18q2)
     
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  11. GeorgeSymonds

    GeorgeSymonds Member

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    @WarpedOne = you can disagree but it would be nice if you actually said what you disagree with. The comparison with Ford and GM was not saying Tesla would be like those companies in any other sense that it would be similar in terms of basic market fundamentals.

    You simply can not linearly extrapolate revenue and share price as history has told us - a 300% increase in revenue over the last 3 years has resulted in a 40% increase in share price. If you did want to extrapolate then using that ratio would be a more sensible starting point ie Tesla would need to achieve 2x or 8B quarterly revenues to reach about $430 or 1.2x increase in share value.

    That's still amazing... don't get me wrong as I believe Tesla will keep growing its revenue, but the share price will not simply double every time the revenue doubles, it just doesn't work like that.

    It worries me in a section under Investor discussions how little some people understand about share prices, company valuations and so on.
     
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  12. WarpedOne

    WarpedOne Supreme Premier

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    Mentioning of GM and Ford in exploring Tesla future potential moves you into care-bear category immediately.
    Tesla has absolutely nothing in common with GM, Ford, Daimler or Toyota, nothing at all.
    Once you understand this you may become capable of wondering what Tesla might be worth and maybe also worth listening to.

    One starts with end-game situation where Tesla is not capable of any growth, GM and Ford and Toyota are all already there, tesla is not.
    What is the end-game for tesla? I'd recon some 5T valuation. Some decades in the future.
     
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  13. GeorgeSymonds

    GeorgeSymonds Member

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    Saying something will be worth 5T sometime in the future is a totally meaningless statement in an investors forum. Even my descendants will be worth 5T at some point in the future just as my ancestors thought $1 was a good weekly wage if you go back far enough.

    A 5T valuation means the share price needs to increase 85 fold - that's only a 16% annual compound growth rate for 30 years.
     
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  14. jhm

    jhm Well-Known Member

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    George are you trying to insult us? I don't appreciate your condescending tone.

    The napkin math works like this. Revenue grow 50%/y from $12B in 2017 to $690B in 2027, meanwhile profitability moves to 10%. Thus, $69B in earnings easily supports $650B to $1T.

    The lower value only implies 30% annual growth over 9 year, not 50% as you misunderstood.

    Likewise, no one is talking about $5T valuations, except you. Please do not insult us with such nonsense.

    The question is whether Tesla can keep growing that fast for another 9 years. Price appreciation in Nasdaq is not the issue. It does not matter what price the stock market puts on it so long as future growth materializes. So the point of taking Tesla is to focus on this growth trajectory and not get bogged down in how the market reacts from quarter to quarter.
     
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  15. GeorgeSymonds

    GeorgeSymonds Member

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    #15 GeorgeSymonds, Aug 18, 2018
    Last edited: Aug 18, 2018
    Erm.. someone did

    Whats your email other than exactly what you've accused me of?
     

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