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Electric blues - Reasons to worry about the US market include its current valuation of Tesla

10/04/2014

Jamie Lowry

Jamie Lowry

Fund Manager, Equity Value

In Forever with blue genes, we quoted some observations of one of The Value Perspective’s favourite investors, Seth Klarman, on current market valuations. One “fashionable” company the Baupost Group founder has picked out by name as having “nosebleed” valuations is Tesla so we thought we would take a closer look at how the electric vehicle manufacturer comes to be valued as highly as it does.

At $250 (£152) a share, Tesla as an overall business is valued at a little over $30bn. Since it has very little net cash on its balance sheet, the company’s enterprise value (EV) – an important metric for all car manufacturers because of the way they are financed – will effectively be the same as its market capitalisation. The calculations that follow are summarised in the table at the end of this article.

Last year, Tesla delivered some 22,500 of its model S type cars, which means the market is currently placing a value per car delivered of $1.4m while the company is actually managing to generate revenue per car of $89,000. Overall in 2013, Tesla generated $2bn in sales, meaning the market is valuing it at 15x sales. As things stand, the company is loss-making so it has an EV/earnings before income and tax value (EBIT) multiple of infinity.

To put it another way, at present, there is no money there – so why might the market be valuing Tesla as it is? To arrive at any sort of answer, we will have to start making some assumptions and, in doing so, we are going to look out to 2020, which represent a key point in the company’s plans for global domination.

The reason for that is because, in six years’ time, Tesla is supposed to be in a position to offer both its existing premium-type car and a comparatively more mass-produced model. So let’s assume that, come 2020, Tesla is producing 100,000 of its expensive cars and 400,000 of the cheaper – and yet to be invented – version.

On those numbers, it works out that Tesla is being valued at $61,000 per car although, because it would be receiving less per car on the cheaper model, revenue per car would also be lower at some $50,000 a sale. Even so – if it gets everything right and assuming it earns peak margins and bearing in mind how optimistic we are being – Tesla could in theory get from $2bn of sales in 2013 to $25bn in 2020.

This would also, of course, be ignoring the question of how much it will actually cost Tesla to put itself in a position where it can go from producing 22,000 cars in 2013 to 500,000 in 2020. this ‘cost of growth’ aspect, as we have discussed in articles such as Counting the cost and Sweetening the deal, is also a hugely important consideration.

Finally, should you need any further reason to question how the market is valuing Tesla, the table below also includes comparable metrics for a luxury car manufacturer in the shape of BMW and a mass-producer in the shape of Ford. However you look at it, Tesla’s 2020 valuation would seem, let us say, unrealistic compared with what you would pay today for other car manufacturers.

Certainly you can see what Klarman is getting at when he talks about “nosebleed” valuations of “fashionable” companies. In theory, Tesla could work up to 100,000 out of a five-million luxury car market – oh yes, also assuming all its competitors just sit back and let it erode their share – but the 400,000 other cars on top of that, which it has not yet designed let alone built, is quite a stretch compared with where it is today.

 

 

2013

2020

BMW (2012)

Ford (2013)

cars

22,477

100,000 (s) +
400,000 (e)

1.85m

6.33m

EV/car ($)

1,360,000

61,000

27,700

8,200

revenue per car ($)

89,000

50,000

52,500

22,000

sales ($m)

2,000

25,000

96,887

139,369

EV/sales

15x

1.2x

0.5x

0.4x

EBIT

-61

2,700

10,521

4,138

%

-3

10.8

10.9

3.0

EV/EBIT

-

11.3x

4.9x

12.6x

Source: Schroders, March 2014

 

Author

Jamie Lowry

Jamie Lowry

Fund Manager, Equity Value

I joined Schroders in 2004 as an equity analyst in the European Equity Team initially specializing in the Industrial sectors before moving on to Consumer-based companies and finally Insurance. In 2007, I became a co-manager on a fund investing in undervalued European companies and took on sole responsibility for the fund in May 2010. Prior to joining Schroders, I worked at Hedley & Co Stockbrokers and Deutsche Asset Management as a trainee analyst.

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