The dynamics at play in the EV market include economics, physics, psychology, jurisprudence, environmental, political, international, climatology, mining, software, innovation, and new technologies. How all of this will develop over the next decade is immensely complex.
We are in the first phase of the EV revolution - EV 1.0. Read my first article on the 3 EV phases. In this first phase we see 2 companies battling the EV game - Tesla(TSLA) and General Motors(GM). Using the capital asset pricing model(CAPM) we will evaluate the current values of Tesla.
Yes, Tesla has been losing money, and is currently cash flow negative. These two facts are irrelevant in the valuation of an equity using the CAPM. The CAPM only looks into the future, and uses the time value of money to estimate current values. Another way to look at this is the present value analysts of all future cash flows.
My estimates for revenues, income, and cash flows for Tesla:
As we can see in the above table, I have broken down my estimates by vehicle lines. Also to note, I am excluding all other non-vehicles financials in the analysis. We can see that 2018 will be another negative year for earnings and cash flows, but in 2019 we start seeing positive financial results.
Also noted in the above table are the 2 equity capital raises coming in 2019 and 2020. These will be needed to reduce debt, and build out the capacity for the truck and semi lines. I estimate this will bring in 10 billion in 2019, and 18 billion in 2020 of new capital.
The above table shows the bull case for Tesla. By 2020 we may see earnings per share of over $13, with a revenue and EPS growth rate of over 150%. Equities growing earnings and revenues this fast typically get a multiple over 50 or more. By this quick measure, the share price for Tesla could exceed $600 a share in 2020.
Revenue and Growth
As seen above, we are estimating very strong growth in 2019 thru 2023. After that growth levels off to a more secular level. Now let's run the CAPM on these numbers.
CAPM for Tesla - the Bull case
As stated earlier, the CAPM is basically discounting all future cash flows - positive and negative, back into today's dollar. The CAPM formula needs the estimated years of cash flows, the time period(number of years to consider), and the discount rate. One could use this formula to value any capital asset, including equities.
A couple of important points about the CAPM:
- All past earnings, cash flows - good or bad are irrelevant.
- When interest/discount rates are low, cash flows even 20 years into the future have a significant present value.
- Discount rate of 6% based on the current risk free rate of 3%.
- Include 15 years of estimated yearly cash flows.
- Base cash flow estimates on the current revenue estimates.
- The cash flows will be based on a modified cash flow margin of 3-5%.
- After 5-6 years of growth, Tesla revenue and cash flows flatten.
The present value(CAPM) of cash flows calculator results(in $millions):
ESP llc cash flow calculator
As we can see in the numbers above with interest rates being relatively low, the current estimated value of Tesla's stock is currently $64 billion - or $375 a share. If we included more years of cash flows, this number would increase. Also of note is that the amount of Debt on Tesla's balance sheet is irrelevant mathematically. Only future cash flows matter. Tesla's debt service cost is included in all the above earnings and cash flow number.
Thoughts for investors
Based on my CAPM valuations, and the current EV dynamics at play, my top pick in this space is Tesla. I have a target price of $375. I have Tesla as a speculative buy due to its large debt position, and potential capacity build out issues. The upside is enormous, but uncertain. I have General Motors as a buy as well, with a price target of $45.
Disclosure: I am/we are long GM, TSLA.