The stock has been on a tear, surging over 400% since the beginning of the year to $US170.62, its closing price on Wednesday.
Using “standard metrics the company seems overvalued,” he wrote.
Of course he does point out that with companies as young as Tesla, we should derive value not from earnings and revenue today, but expectations for these in the future.
Here are Damodaran’s assumptions for his current valuation:
- He forecasts revenue of $US65.42 billion in 2022. He takes an optimistic view i.e. Tesla is an automobile company that happens to specialize in electric cars, and he measures its potential revenues by looking at the biggest automobile companies today.
- Assuming that Tesla will continue to focus on high-end automobiles, Damodaran writes 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.” He expects the biggest margin improvements to occur in “the near years.”
- Those margins will allow Tesla to “generate more than $US8 billion in operating income by year 10,” (see chart above) making it more profitable than all automobile companies other than Toyota, Volkswagen, and BMW.
- In terms of investment requirements, he expects that Tesla will have to invest $US1 in capital for every additional $US1.41 in revenues. “The return on invested capital that I obtain for Tesla in steady state (in year 10), based on my estimates of operating income and invested capital, is 11.27%, putting it again at the top decile of automobile companies.”
- Tesla faces a few risks including business/operating risk, some in terms of the strength of the economy, interest rates and so on, and others from changes in technology. It will also face geographic risks from looking for riskier markets. And truncation risks — “A large shock to its business (from a legal setback, a recession or a sector-wide slowdown) could put the company’s survival at risk.”
So what’s Damodaran’s “bottom-line”?
For a young company to mature it has to 1) grow revenues, 2) start posting profits, 3) generate enough money for reinvestment. “I am assuming all of these at Tesla but my estimated value per share of $US67.12 is well below the market price of $US168.76.”
He reiterates his assumptions are very optimistic.
Earlier today he tweeted, “Assuming Tesla grows to have Audi-like revenues ($67 b) & Porsche-like margins (12.5%), I can’t get past $US70/sh.”
You can see Damodaran’s valuation spreadsheet here.
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