Late last year, NYU finance professor Aswath Damodaran valued Tesla at $US67. The stock was trading at about $US170 then.
Now, Damodaran has revisited the stock in a new blog post, and is valuing it between $US110 – $US115.
The stock is currently trading at $US220, and is down from its all time intra-day high of $US265.
Here’s a look at Damodaran’s assumptions:
- He forecasts revenue of $US79.21 billion ten years from now. This is up from his previous forecast of $US65.42 billion. Damodaran looks at the latest earnings and points out that, “Tesla continues on its path to higher revenues,” and sees “added revenues from the electric battery business to auto revenues.”
- “Entering the electric battery market is likely to lead to lower margins, not increase them,” and Damodaran has lowered his expected operating margin to 12.0% in year 10, from 12.5%.
- Higher revenues will lead to higher operating income of $US9.50 billion, up from his previous assumption of $US8.18 billion.
- In terms of investment requirements, he expects Tesla will have to invest $US1 in capital for every additional $US1.55 in revenues. This is up from $US1 in capital for $US1.41 in revenues in his prior model.
- Now that Tesla has increased access to capital through its $US2 billion bond offering, it has lower losses and it has larger market cap he thinks the probability of failure is 0%. “This should allow the company to survive even major shocks.”
Damodaran says investors should consider three things when looking at Tesla. The first is the discounted cash flow (DCF). When it comes to this its important to remember that Tesla will have to “make substantial infrastructure investments over the next decade, to deliver its growth potential.”
He also looks at buzzwords surrounding the automaker. Tesla has the trifecta: China, batteries, and disruptive. The company has announced that it is expanding into China, and building a Gigafactory to produce electric batteries. But for the $US220 value you need the battery business to add “about $US90 billion to Tesla’s annual revenues by the tenth year.” It’s also important to remember that other companies like Honda, are also “in this disruption game.”
Finally, and this is the stuff from Damodaran we watch closely, he talks about ‘keeping the faith’. “My investment philosophy is built on the foundation that you should buy an asset only if it trades at a price less than your estimated value for that asset, error-prone and uncertain though the latter may be,” Damodaran writes.
“It is true that I can offer no proof that my value is right, that the price is wrong or even if the first two assertions are true (right value, wrong price), that the price will adjust to the value, but is that not the essence of faith? That you believe, without proof! If I stay true to my philosophy, I cannot justify buying Tesla at the current price. Of course, a year from now, the stock may be at $US400, but I will have no regrets, because I also believe that if you don’t stand for something, you will fall for anything.”
Note: Damodaran is not short Tesla and he does not plan to short the stock And he doesn’t believe his valuation is the ‘right’ valuation.