TESLA STOCK ANALYSIS: More than just EV


A few weeks ago, $MS gave their 1 year forecast for $TSLA . I don't really listen to these forecast but here's what they had to say: Bear case $10, bull case $390. I've never seen such a big difference in bear case and bull case. Actually, if you think about it, it makes sense. Because Tesla is one of the most loved companies on Wall Street and at the same time it has a record number of short-sellers. So, I've decided to do what any intelligent investor would do, find the intrinsic value of Tesla for today. II've the same method that Warren Buffett $brk.b uses to calculate the intrinsic value of a company, that is, adding all the future owner's earnings(free cash flow) from today to judgement day using the appropriate discount rate. This is one of the hardest calculations I've ever made since their are so many variables to take into considerations.

I also had to make some big assumptions

1. Right now the average revenues per EV sold is $75000. For $DAI.DE it is $56000, $BMW.DE $48000 and $TM $26000. Tesla has a higher number since they have only been selling high-end vehicles so far but now with the model 3, they want to target the masses. Hence, the assumption is that gradually, they are going to make $60 000 per car sold. It is still higher than Daimler which makes heavy vehicles and BMW which owns Rolls Royce.

2. Last year, they sold 250 000 cars, so I'm assuming that by 2039, they can sell 2 million EV per year. I know that Elon musk has been more optimist on these numbers but so far he has always been lagging behind in production and sales forecast. So 2 million cars sold per year after 20 years is reasonable considering that right now $BMW.DE is selling 2.3 million vehicles a year.

3. Currently 86% of their revenues come from car sales. We should not forget that Tesla is also an energy company owning SolarCity. So the third assumption is that car sales will always account for 80-85% of total revenues

4. Elon Musk hopes to make Tesla the most profitable automotive company. BMW currently holds this title with a profit margin of 8%. The industry average is 4-5%. Making cars is a capital intensive business so we should not expect Tesla to be able to make more than 10% when the company reaches its peak. Right now it is not profitable, so I've assumed that it will eventually become profitable(last year it had two profitable quarters and a first time positive operating cash flow). and the profit margin will grow to 10%

Taking all of these assumptions into consideration and with the appropriate capital expenditure(I looked at industry average). I estimated the future free cash flow of the company. For any company, I assume growth for 20 years and then the company stops growing(it doesn't really matter after 20 years because of the discount rate).

Now the most challenging part, which discount rate to use? Warren Buffett suggest that you look at the the 10-year treasury bonds yield ,which is currently around 2.5% and use a discount rate higher than that. You should also look at alternative investments to find the discount rate. I did just that. My best stocks in my portfolio are $AAPL $JPM and $FB so if I'm going to make a new investment, I should use a discount rate higher than what I used for these. I also have to consider BMW which I already own. I've come to the conclusion that the discount rate for Tesla should be 13%. I know that it is quite high but I rarely used below 10% and Tesla still has a lot of debt at high interest rates, a lot of accumulated deficit, I don't like the fact that Elon Musk was given a $2.3 billion compensation last year. So, 13% was the lowest i could go.

The Intrinsic value of Tesla, in my opinion, is $17 Billions ($95/share). Now considering the many assumptions I made and the risk with the investment, I have to use a margin of safety of 40%. Therefore, the fair value of the company, in my opinion, is $10 Billions($57/share).

I don't think that Tesla shares are going to fall to $57 for me to be able to invest. Long-term, I am bullish on Tesla but it is not at the right price for me. I'll stick to BMW which is trading below book value.

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