Saturday, September 7, 2013

Valuation Guru: Tesla is Worth a Fraction of Its Stock Price

Aswath Damodaran, who literally wrote the book on stock valuation, took a close look at Tesla's value and came up with a fair value at a fraction of its current stock price.  It closed on Friday at $166.40 but according to Professor Damodaran, it's fair value is only $67.12, 60% lower.  Some might assume that he was using pessimistic assumptions to value TSLA and that is why he came up with such a low number.  Nope.  In fact, I would argue that he used optimistic assumptions.  

First, he assumes that by 2022, TSLA would be much bigger than more established companies like Kia, Porsche and Mazda and be about as big as Audi.  We'll see about that.  Tesla doesn't exactly have a wide range of cars, so it is unclear whether it can even be any bigger than a niche car brand.  It also doesn't have a track record outside of the US and all of those other brands get much of their sales internationally.  

Second, he assumes extremely high profitability for TSLA, much higher than the norm:

Note that the sector has low pre-tax operating margins, with the median value of less than 5%. Companies at the 75% percentile generate margins of between 7.5% and 8.5% and there are a few companies that generate double digit margins.  One of the outliers is Porsche which reported a pre-tax operating margin of close to 16% in 2013, though its ten-year aggregate margin is closer to 10%. You can download the dataset that includes the key numbers for all auto companies by clicking here
For Tesla, we will assume that its focus will continue to be on high-end automobiles and that is margins will converge towards the higher end of the spectrum. In fact, I am assuming that the technological and innovative component that sets Tesla apart will allow it to deliver a pre-tax operating margin of 12.50% in steady state, putting it in the 95th percentile of auto companies (and closer to the margin for technology companies).
Based on my estimates, Tesla will generate more than $8 billion in operating income by year 10, making it more profitable than all but three other automobile companies today (Toyota, Volkswagen and BMW).  

So TSLA is assumed to become one of the most profitable companies in the industry.  That seems pretty aggressive, no?  Especially considering that if it wasn't for using non-GAAP revenues (a sign that the company is really just manufacturing good news for their earnings press releases) they wouldn't be anywhere close to profitability. 

What this all means is that even if the stock price falls 60%, it still is not anywhere close to cheap as you would need historically optimistic assumptions just to justify that stock price, much less show any upside.

We have an equity bubble in this country thanks to Ben Bernanke and the Fed printing press.  Eventually it will pop and TSLA investors are going to get creamed.  Unless of course they find a greater fool to sell their paper to before then.

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