Tesla Inc (TSLA) – Price-Implied-Expectations (Apr 2017)

What are Price Implied Expectations (PIE)The idea behind PIE is to start with the current stock price and use the discounted cash-flow model to reverse engineer what the market implies about a company’s future performance.

In TSLA’s case, with all else held at auto industry standards, there appears to be an astronomical expectation of growth built into the price today. The billion dollar question then is: Will TSLA grow to $105bn in sales by 2026?

Metric

Numbers

Narrative

CAP period 

10 years

For a young company (13-year-old) with a massive story – it is fairer to assume the market is taking a 10-year CAP.

Operating margin

(9%) for the next five years, then 5% until year 10 

Getting even a rough estimate of this was tricky. Tesla has yet to generate a single drop of profit. So we assume that TSLA continues to generate losses at (9%) for the next 5 years. Followed by a steady 5% EBIT margin – which is the average After-Tax Lease-adjusted margin of the Auto industry.

Growth rate (10 year CAGR)

33%

This was reverse derived after considering margins and reinvestments. A staggering CAGR of 33% growth implies that TSLA’s revenues will be $105bn in the year 2026. Today they are $6bn. (17.5x growth)

For a little context, GM, among the largest car manufacturers in the world today, generates $166bn in sales.

Reinvestments

$7bn total over the next 10 years

TSLA has spent $5bn in reinvestments in the past 10 years, most of which has been in the past five years. With Musk’s ambitious plans of building additional grids, power-generation facilities, R&D and recharging stations, we assume that the company pours another $7bn over the next 10 years.

Cash tax rate

(3%) until Year 5, followed by 35% until Year 10

For a loss-making company, TSLA has been receiving tax rebates for the past 10 years. We assume that while it continues to lose money over the next 5 years, it receives rebates at 3% per year.

Starting year 6, we assume TSLA’s statutory tax rate of 35%, which is what the tax rate would revert to over the long term.

WACC for Steady

5%

Industry WACC is 4.16%

WACC for CAP

7%

Assuming higher during CAP period, since TSLA will likely pile on more debt during this period

Inflation 

1.9%

Op Leases

$3.14bn

Uncapitalized leases today

by Shabbar Husain Kothari

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