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Reverse Engineering Tesla’s Valuation

February 20, 2014 | About:

With Tesla (TSLA)’s stock soaring again after an earnings report and a rosy projection for 2014, the financial media has been touting how great Tesla is, and many so-called experts are screaming “buy buy buy” for TSLA.

What is often forgotten, not by value investors though, is that a rosy projection does not translate into a great investment. On the contrary, very often, a rosy projection poses the greatest danger to investors as it costs dearly to play the growth game.

Let’s move back to March 31, 2013, and run a quick back-of-envelop calculation. Let’s only have four4 simple assumptions for the sake of brevity.

Assumption 1: Instead of a growing company, Tesla has become a mature automobile manufacturer.

Assumption 2: P/E ratio of 15 for a mature automobile manufacturer.

Assumption 3: A profit margin of 7%, which is comparable to that of BMW, which is a mature automobile manufacturer.

Assumption 4: Average selling price of $90,000, which is close to a Model S’s sale price.

Here is the result:

Price of TSLA as of 3/31/2013

$38

Shares Outstanding as of 3/31/2013

124,300,000

Market Cap

$4,723,400,000

P/E For A Mature Company

15

Implied Earnings

$314,893,333

Profit Margin for BMW

7%

Implied Sales

$4,498,476,190

ASP

$90,000

Implied Volume

49,983

Volume Projection for 2013

21,000

It is easy to see that if Tesla were a mature company a year ago, it “only” needs to increase its sales volume by 138% under this scenario, an aggressive but not an impossible goal.

Fast forward to today, if we use the same assumptions and do the same back-of-envelop calculation, the result looks something like this:

Price of TSLA as of 2/19/2014

$216

Shares

122,590,000

Market Cap

$26,000,000,000

P/E For A Mature Company

15

Implied Earnings

$1,733,333,333

Profit Margin

7%

Implied Sales

$24,761,904,762

ASP

$90,000

Implied Volume

275,132

Volume Projection for 2014

35,000

Now if Tesla were a mature company, it almost has to have a sales volume eight times its current sales volume to justify its valuation. Remember this is assuming that Tesla has achieved the same 7% net margin as BMW, which is yet to be proven.

Granted, the above analysis is very simple. I have tried other reverse calculations that involve more assumptions and more complicated models. The results are not that much different from the simple analysis. To quote Buffett, “If somebody walks in this door and they weigh between 300 and 350 pounds, I don't need to say they weigh 327 to say that they're fat.”

“What the wise man does in the beginning, the fool does in the end.” Such is the case for investing in fast growth stocks with momentum. Whether it is the beginning or the end is subject to great judgment and variation. However, our reverse calculation can give us enough confidence that the beginning has long passed.

Disclosure: No Position.

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