Introduction
The last time I wrote about Tesla Inc. (TSLA, Financial), I highlighted Tesla Energy's generation and storage business is very likely just at its humble beginning, which now, in light of a recently announced partnership with Vestas Wind Systems (VWDRY, Financial), seems to have advanced to the next level.
A spokesperson for the company said in a statement:
“Across a number of projects, Vestas is working with different energy storage technologies with specialized companies, including Tesla, to explore and test how wind turbines and energy storage can work together in sustainable energy solutions that can lower the cost of energy.”Â
Interestingly, this statement came just one month after the company teamed up with offshore wind energy development group Deepwater Wind to build the U.S.’s first offshore wind farm in Rhode Island, equipped with a 40 megawatt-hour Powerpack storage system. Coupled with the launch of Tesla’s mass-market automotive product – Model 3 – earlier this summer, the company has clearly started gaining significant momentum, which will only grow over time.
Big names calling Tesla a trillion-dollar company
Without much hesitation, Tesla has been called a trillion-dollar business several times. Ron Baron (Trades, Portfolio), billionaire investor and CEO of Baron Capital, recently reiterated his view that Tesla’s shares will hit $500 to $600 by 2018 and $1,000 by 2020. By the end of the next decade, he expects Tesla to become a $1 trillion company. Another famous analytical mind, Gene Muster, founding partner of Loup Ventures and former star Apple (AAPL, Financial) analyst at Piper Jaffary, then compared Tesla's Model 3 with the introduction of the first iPhone and believes Tesla's work in the automotive industry could result in a major paradigm shift.
So is Tesla on track to become a trillion-dollar company?
Shares outstanding are skyrocketing, but so is revenue
Perhaps the most critical issue shareholders are currently facing is stock dilution. Historically, Tesla suffers from a chronic shortage of cash to finance its current operations and expansion plans. As Bill Cunningham, Tesla’s long-term bear, has pointed out on several occasions, the company has barely enough cash to pay for already incurred and anticipated capital expenditures for the global Model 3 launch. Hence, besides the recently sold $1.8 billion of bonds at 5.3% yield, another capital raise may be expected in the foreseeable future. Over the last four years, the number of outstanding shares grew at a compound annual rate of 9%. In the last year, however, this growth has accelerated to over 20%. On the other hand, revenue has accelerated as well. Based on Reuters methodology, three-year revenue growth stands at 51.5%, while one-year revenue growth hit 73%.
Valuation
In my first Tesla analysis, I valued the company using Damodaran's discounted cash flow model with revised revenue growth assumptions. This time, however, I decided to apply the revenue variation of Peter Lynch's earnings line as I believe it can better estimate the long-term progression of the company's intrinsic value. Assuming 60% annual revenue growth, 20% annual growth in the number of shares outstanding and an unchanged current trailing 12-month price-sales (P/S) ratio of 5.5 times, the company's intrinsic value by the end of 2020 is forecasted to reach $753, which implies almost 30% total annualized rate of return upside potential. Of course, this is just a rough estimate and different assumptions will produce different intrinsic values as demonstrated in the valuation output below.
A trillion-dollar company?
So what would have to change for Tesla to be called a trillion-dollar company? Well, let's play with the assumptions below:
- Longer time frame – holding all other inputs unchanged, Tesla's market cap could reach the $1 trillion mark by 2023, or just three years after my three-year valuation estimate.
- P/S multiple growth – P/S ratio would have to rise to 22 times by 2020.
- Higher revenue growth – annual revenue growth must have exploded to 130%.
The bottom line
To sum up, apart from the first point, the latter currently seems very unlikely. Therefore, I believe Tesla could eventually become a trillion-dollar company, but it will not happen anytime before 2023. With ongoing financial pressures, I see the per-share 2020, $753 fair value estimate as the best-case and the most probable scenario. The good news is even in case of a revenue growth slowdown to 50% a year, Tesla's per-share fair value estimate is $582 at a P/S ratio of 5.5 tmes and $476 at a P/S ratio of 4.5 times – still above the current market price.
Disclosure: The author's portfolio includes shares of Tesla and Vestas Wind Systems. Please note that this article has an informative purpose, expresses its author's opinion and do not constitute investment recommendation or advice. The author does not know individual investors' circumstances, portfolio constraints, etc. Readers are expected to do their own analysis prior to making any investment decisions.
