Tesla’s estimated fair value based on 2nd stage free cash flow to equity is US$187
Tesla’s US$243 share price suggests it could be worth 30% more
Our fair value estimate is 21% below Tesla’s analyst price target of US$237
Today we look at Tesla, Inc. by estimating the company’s future cash flows and discounting them to their present value. (NASDAQ:TSLA) This will be done using the Discounted Cash Flow (DCF) model. Don’t be put off by the jargon, the math behind it is actually quite straightforward.
We would caution that there are many ways to value a company and, like DCF, each technique has advantages and disadvantages in certain scenarios. If you want to learn more about discounted cash flow, the logic behind this calculation can be read in detail in the Simply Wall St analysis model.
See our latest analysis for Tesla
Crunching the numbers
We are going to use a two-stage DCF model which, as the name suggests, takes into account two stages of growth. The first phase is typically a high growth period that builds towards a terminal value, which is captured in a second ‘stable growth’ period. In the first step we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these are not available we estimate the previous free cash flow (FCF) from the previous estimate or reported price. We believe that companies with decreasing free cash flow will have their contraction rate slow, and companies with growing free cash flow will have their growth rate slow over this period. We do this to reflect that growth in the early years tends to be more slow than in later years.
DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of future cash flows by their estimated value in today’s dollars:
10-Year Free Cash Flow (FCF) Forecast
Levered FCF ($, million)
growth rate estimates source
Estimate @ 28.92%
Estimate @ 20.91%
Estimated @ 15.30%
Estimate @ 11.38%
Estimated @ 8.63%
Estimated @ 6.71%
Present value ($, million) discounted at 10%
(“Estimate” = Estimated FCF growth rate by Simply Wall St.)
Present value of 10-year cash flows (PVCF) = US$232b
The second stage, also known as terminal value, is the cash flow of the business after the first stage. The Gordon Growth Formula is used to calculate the terminal value of a 10-year government bond yield at a future annual growth rate equal to the 5-year average of 2.2%. We discount the terminal cash flows to today’s value at a cost of equity of 10%.
Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$78b × (1 + 2.2%) ÷ (10%- 2.2%) = US$975b
Present Value of Terminal Value (PVTV)= TV / (1 + R)10= US$975B÷ (1 + 10%)10= US$361B
Net value, or equity value, is the sum of the present value of future cash flows, which in this case is US$593b. The final step is to divide the equity value by the number of shares outstanding. Compared to the current share price of US$243, the company appears potentially overvalued at the time of writing. However, valuations are vague instruments, rather like a telescope – move a few degrees forward and end up in a different galaxy. Be sure to keep this in mind.
The above calculations rely heavily on two assumptions. The first is the discount rate and the second is the cash flows. You don’t have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. DCF also does not consider the potential cyclicality of an industry, or a company’s future capital requirements, so it does not give a complete picture of a company’s potential performance. Given that we are looking at Tesla as potential shareholders, the cost of equity is used as the discount rate rather than the cost of capital (or weighted average cost of capital, WACC), which accounts for debt. Is. In this calculation we have used 10%, which is based on a leverage beta of 1.645. Beta is a measure of a stock’s volatility compared to the overall market. We derive our beta from the industry average beta of comparable companies globally, which has a range between 0.8 and 2.0, which is a reasonable range for a stable business.
SWOT analysis for Tesla
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Instead the best use of the DCF model is to test certain assumptions and theories to see if they would under- or overvalue the company. For example, if the terminal price growth rate is slightly adjusted, it can dramatically change the overall result. What causes share price to exceed intrinsic value? For Tesla, we’ve compiled three essential factors you should explore:
risk: For example, we have discovered 1 warning sign for Tesla You should know about this before investing here.
future earnings: How does TSLA’s growth rate compare to its peers and the broader market? Get a deeper dive into analyst consensus numbers for the coming years by interacting with our free Analyst Growth Expectations chart.
Other high quality options: Do you like a good all-rounder? Check out our interactive list of high-quality stocks to find out what else you’re missing!
P.S. The Simply Wall St app conducts discounted cash flow valuations for every stock on the NASDAQGS every day. If you want to know other stock calculations just search here.
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This article from Simply Wall St is of a general nature. We only provide commentary based on historical data and analyst forecasts using unbiased methodology and our articles are not intended to provide financial advice. It does not recommend buying or selling any stock, and does not take into account your objectives, or your financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.