It appears the good professor is developing a cottage industry in Tesla valuation posts.
From Musings on Markets:
Many a slip between the cup & the lip: From forward value to value per share today
Valuing young, growth companies is never easy to do but it is well worth doing, partly because it forces you think through the business that the firm is in and what it is doing (or needs to do) to succeed. I know that many of you disagreed with my assumptions on the Tesla valuation and this post is not meant to refight that battle. There is one aspect of the Tesla valuation that I would like to focus on, not so much because of what it says about Tesla but for the more general lessons about what drives the value per share at young companies.
In the Tesla valuation, I made the judgment that Tesla would have Audi-like revenues and Porsche-like margins to conclude that the equity was worth $8.15 billion today. That puzzled a lot of people, since Audi currently has a market cap of $33 billion and that market cap would be even higher if the company commanded Porsche-like margins. So, why is my value for Tesla's equity so low today?
...MOREIf you revisit my valuation and check the value that I have attributed to Tesla in year 10 (the year that I see them having Audi-like revenues and Porsche-margins), you will see an estimated value of $68.27 billion. To get from that expected value for a business in the future, estimated either using a DCF model like I did or by applying a multiple on earnings as many venture capitalists becomes a value today, you have to take into account the following “drags” on value:1. Time value of money: Every finance/investments class begins with the proposition that a dollar today is worth more than a dollar ten years from now and that principle should not be abandoned when doing valuation. Thus, even if I take the unrealistic view that Tesla’s value in year 10 is guaranteed, I would have to discount that value back at the US T.Bond rate of 2.75% (at the time the valuation, used as the risk free rate) to arrive at the value today:Estimated value for Tesla in year 10 = $68.27 billionPresent value of $68.27 billion @ 2.75% = $52.05 billion
Drag on value from time value of money = $68.27 - $52.05 billion = $16.22 billion
2. Business Risk adjustment: An uncertain dollar in the future is worth even less than a certain dollar at the same point in time, which is the logic behind using a risk-adjusted discount rate. In the case of Tesla, I used a cost of capital of 10.03% for the first five years, reflecting its mixed exposure to the automobile and technology businesses, and scaled that cost of capital down to 8% in year 10. The net effect is that a dollar in expected cash flow in year 10 is worth only about 40.65 cents today. Think of this as the compensation that you are asking for as an investor for the uncertainties and disappointments that will come over the next decade.Present value of $68.27 billion @ 2.75% = $52.05 billion
Present value of $68.27 billion @ risk adjusted cost of capital = $27.75 billion
Drag on value from risk adjustment = $52.05 billion - $27.75 billion = $24.30 billion...
And it would appear that we have a cottage industry in linking to his posts. Previously:
Sure, He Called the Top In Apple and He Called the Bottom in Facebook But Tesla Fair Market Value at $67.12? (TSLA)
Tesla: More on the $67.12 Valuation (TSLA)
