Tesla Valuation

 Tesla Inc

I assumed that my readers are interested in EVs and hence I will not go through Tesla as what I did for NIO and XPeng. My focus will be on the valuation part. I will still justify the assumptions for the valuation of Tesla. First of all, I believe Elon Musk is determined and capable of delivering what he has promised for the next 5-10 years.

valuation

Production Capacity

Table 1 displays the current status and schedules for Tesla factories. Recently, Tesla says it will start a new factory capable of producing 450,000 EVs per year next to the existing plant.

Table 1 Status of Tesla factories

Recently, production capacity is Tesla’s revenue ceiling. The question turns to be what Tesla final ceiling will be. Tesla has demonstrated the brand is worldwide proven. It has a strong image to expand its international marked. On the contrary, there is still a long way to go for NIO and XPeng. Tesla’s final market share will be limited by the global automotive market and its competition position. Regarding its competitors, it will face the rising EV models from the traditional automotive giants and the new EV companies.

I have collected number of sold vehicles from the three traditional large automotive manufacturers (Table 2). Last year, Toyota group topped auto sales in 2021. It seems 11 million vehicles per year has been the cap for these three giants.

Table 2 The number of vehicles sold for the last 5 years

In 2021, the total cars sold worldwide is above 66 million. If the growth rate is 2%, then total cars sold in 10 years would be approximately 80 million. The most common opinion about EV marked share is 50% in 10 years. If Tesla takes a bit over 20% of the EV market share, it will reach 8.9 million in 2032. If EV market penetration becomes as high as 70% and Tesla’s market share of EV is around 40%, then 22 million per year is met.

I have carried out three major scenarios – lower baseline, better baseline and best. Table 3 displays the vehicles actually delivered (2013-2021) and the estimated figures (2022-2032).

Lower baseline (5.4 million in 2031) – the highly likely situation according to its production plan and the strong market brand.

Higher baseline (8.8 million in 2031) – very possible situation which implies Tesla would grow up as large as today’s traditional giants.

Best scenario (22 million in 2031) – Extremely difficult but possible.  

Table 3 Vehicles delivered by year

Note: * -- the estimated number of deliveries

Tesla’s life cycle

 I think Tesla will enter into maturity period in 10 years when it reaches the potential of its EV market penetration. However, the larger part of its revenue could come from monetization of its software. Furthermore, its AI technology is highly likely to be applied in many other areas. In that case, Tesla would embrace another hop in its revenue. Currently, I haven’t taken it into account.

 Therefore, I have divided Tesla's life cycle into 2 stages:

 Stage 1: 2022 -2021 highly growth period

Stage 2: from 2032-  plateau with 2% real growth rate

Gross Profit Margin

 In 2021, Tesla’s total gross profit margin is as high as 25%.  It is very likely that the figure would increase to 30% because of its continuous innovation of the production process, e.g. one-piece casting. Especially, the new factories are designed to be more efficient in the whole manufacturing. With the more proven software, I actually think 35% in the long term is very possible. Out of conservatism, only 30% is applied.

Operating Margin

According to recent figures, the expenses of R&D and SG&A to revenue is actually low compared with the other automotive companies. Therefore, I have only rectified the percentage a little.

A summary of the input assumptions: 

Discount rate --WACC

I have made a detailed explanation of my choice of WACC in my post - NIO. I will apply WACC = 10.08% to the valuation of Tesla. 

Taxation

 I have raised the tax rate for Tesla to 25% from 2026 since Tesla is American based company. It could be affected by Bidens possible corporate income tax reform soon.

Results

WACC = 10.08%

The total present value of the company:

Ø  Lower baseline: $ 565 billion

Ø  Upper baseline: $ 1,099 billion

Ø  Best: $ 2,237 billion

After the deduction of debt and divided by the number of basic and diluted shares, the estimated values per share are:

Ø  Lower baseline: $493

Ø  Upper baseline: $973

Ø  Best: $2,237

Validation of the results

In order to validate the appropriateness of the model assumptions, I present the multiples to look at the solution from another perspective. The more detailed explanation is in the post – NIO.

For the terminal period, justified P/E = 16.5 and justified P/S =2.3.  P is the terminal value of the equity from the model. E and S refer to earnings and sales at the first year of the terminal period. Teslas justified P/S seems higher than that of NIO (1.5) and XPeng (1.6). The reason is that the assumed profit margin of Tesla is much higher than NIO/XPeng.

 

According to statistics from MSCI World Automobiles Index[1], fundamentals P/E=15.99 and P/E Fwd=14.31 for MSCI World Automobiles industry. The P/E from my calculation is close to the industry level.

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[1] https://www.msci.com/documents/10199/9eae1855-a008-4220-82ea-d3a4a8cfd032