Tesla: Math

| About: Tesla Motors (TSLA)

Summary

What does Tesla's valuation imply under the best-case scenario?

No claims or controversy regarding lies or scams, only the numbers.

There is no upside left in Tesla for several years at least.

There is no shortage of articles on Tesla (NASDAQ:TSLA). In the past, there was a solid mix of both positive and negative. As Elon Musk's goals became more and more ambitious however, it's safe to say sentiment, at least on Seeking Alpha, has turned overwhelmingly negative. Having said that, there are fewer articles that really discuss valuation.

I agree with longs that the product itself is quite amazing. I have both sat in and test-driven one. While I believe the bears have made a stronger argument, I will not be making any conjectures regarding whether Elon Musk has lied or whether Tesla is a scam. I will also defer looking at cash flow, clearly cash burn is not a consideration for bulls because they believe Tesla will have access to the financing and the burn is aka investing. This article will briefly look at the numbers to only answer one simple question: what does Tesla's current valuation imply?

I will keep it very simple. Let's start by assuming Tesla succeeds:

Car Model ASP (US$) FY16 Deliveries FY20e Deliveries Implied Revenue (US$ m)
Model S 74,000 50,000 100,000 7,400
Model X 80,000 30,000 60,000 4,800
Model 3 42,500 - 500,000 21,000
Total 33,200
Click to enlarge

Source: Tesla Filings, SA Articles, Mother Nature Network

EDIT: The tax credit issue has been fixed; I had mistakenly believed customers pay the cash to Tesla first for it to be remitted to the government for a credit.

Let's give them the benefit of the doubt and assume all deliveries = sales. Not only do they hit the low-end guidance of 80,000 in FY16, but they then proceed to DOUBLE sales of the Model S and X into 2020. They also fully meet their 500,000 Model 3 guidance, albeit with some delays. This is relatively fair, both the Model S and X saw significant delays. If you want to check the numbers for ASP please look through the 10-K for 2015.

Moving on, if we assume 10% EBIT margin, which reflects the margin of a MATURE luxury auto manufacturer like Mercedes (OTCPK:DDAIY) or BMW (BAMXY), then we arrive at an operating profit of just over $3bn. Note it took many many years of cost optimizations to reach this margin and even then, it is during a healthy auto sales cycle. Everyone can understand a multiple, so for the purposes of appealing to the masses, let's leave it at that.

The multiple assigned by the market for these luxury car brands is ~10x. So we arrive at a $30bn enterprise value (EV). Then we take another step for formality and assume Tesla capably pays off ALL debt by 2020 such that the EV generally matches market capitalization. And the result is the current share price.

A shareholder of Tesla, in addition to believing in the story and cause, also (I hope) wants to make money. The current valuation of Tesla has priced in total success and perfect execution several years into the future. So even if the share price does NOT fall, the upside is nonexistent until past 2020.

Some investors may argue that Tesla is not just a CAR company, it's a technology company. Well... it's not. But even if it were, technology hardware companies trade at similar multiples; no one can believably say Tesla is a software internet company right? And if you want to say it's a future utility, that multiple is less attractive. It's great that you believe in the cause of Tesla, but perhaps confusing that with generating a good return on your investment may not be the best strategy. Certainly, you can find better uses for your cash over the next 2-3 years.

Disclosure: I am/we are short TESLA JAN 18 CALLS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.