Over the past few weeks, Tesla Motors Inc (NASDAQ:TSLA) stock has fallen from the all-time high of about $193 to near $140. Some argued that the decline was fueled by three incidences of car fires in less than six weeks. However, we believe the Model S fire wasn’t the real decline behind the fall. The stock was trading at such a high level that it was vulnerable to the downside from any negative headline.
Equity research firm Valuentum thinks that the stock is now “fairly valued” after the recent decline. Tesla Motors Inc (NASDAQ:TSLA) aims to revolutionize the auto industry with high performance electric cars. Though its Model S cars have a 260 miles range, it’s still too early to say if battery advancements can improve the range and performance further. Plus, the stock has been highly volatile, which makes it a speculative play. Investors (or speculators) have focused more on Tesla Motors Inc (NASDAQ:TSLA)’s perceived earnings potential rather than its book value.
Valuentum found that Tesla Motors Inc (NASDAQ:TSLA)’s free cash flow margin (FCF divided by total revenue) over the past three years has been extremely low. Companies generating FCF margin above 5% are considered cash cows. But the Elon Musk-led company’s cash flow from operations tanked 126% between December 2010 and December 2012. Meanwhile, cash expenditures jumped 21%.
Tesla Motors Inc (NASDAQ:TSLA) is valued between $96 and $160 based on the discounted cash flow model. Valuentum has a medium risk rating on the stock. To calculate the value of Tesla Motors Inc (NASDAQ:TSLA), the equity research firm assumed the company’s revenue to grow at 67.6% over the next five years. The expected operating margin for the next five years is 10.7%.
The company’s total equity value is estimated at $13.73 billion (chart below). Dividing the equity value by the total number of diluted outstanding shares gives a fair value estimate of $128. For every company, volatility in the key valuation drivers gives a range of probable fair values. For Tesla Motors Inc (NASDAQ:TSLA), Valuentum estimates that the electric carmaker is an attractive buy below $96 a share, but is an expensive investment above $160.
Tesla Motors Inc (NASDAQ:TSLA) shares rose 1.29% to $142.29 in pre-market trading Friday. The company is increasing its production significantly, so analysts think that Tesla Motors Inc (NASDAQ:TSLA) could easily beat its Q4 delivery guidance.