At this point, trying to place a value on Tesla Motors Inc (NASDAQ:TSLA) is virtually impossible. When you look from one model to the next, you see an incredible array of methods used for valuation. Bulls use projections for Generation III—a car which doesn’t exist yet—sales, but Morgan Stanley analyst Adam Jonas goes even further. He believes the automaker will disrupt more than just the auto industry, and he has worked these speculations into his model. He sees the potential for disruption in the utility industry as well, although most of his numbers are focused on auto sales.
Of course there’s always a chance he could be right about Tesla Motors Inc (NASDAQ:TSLA), but is his valuation of the stock right now realistic? Bears might be scoffing at his team right now, although they could be scoffing at the bears several years from now. No one can really argue that blowing a target price up from $153 to $320 a share overnight is normal, but then, Tesla certainly isn’t normal, so why should its valuation be?
Tesla’s market cap now half of Ford
Tesla Motors Inc (NASDAQ:TSLA)’s market capitalization surpassed an astonishing $30 billion today, making it right about half that of Ford Motor Company (NYSE:F) and more than half that of General Motors Company (NYSE:GM). So where does Jonas and his team get their enormous valuation for Tesla from? It’s really very simple. They don’t value it like “traditional” automakers, which are valued on near-term multiple metrics.
Instead, they’ve selected a “15-year time horizon” for their model because they believe Tesla Motors Inc (NASDAQ:TSLA) will multiply its revenues by more than 10 times through 2016. By 2020, they project Tesla’s revenues to be multiplied by almost 30 times, and then by 2028, they believe the automaker’s revenues will be multiplied by about 60 times.
The Morgan Stanley team has applied an 11% weighted average cost of capital with a range of between 9% and 13%. They calculated the terminal value on a midpoint of 10 times EV / EBITDA, which they say makes up about half the total discounted cash flow value “across the range of methodologies” which they have applied in their valuation.
Examining the base case for Tesla
Their base case is for Tesla Motors Inc (NASDAQ:TSLA) to hit $320 a share in 12 months. To come up with this, they’re assuming the “successful commercialization” of the Model S, the Model X and the Generation III vehicle. They define “successful” as surpassing a combined 1.1 million units by 2028. That’s right. Fourteen years from now. (Personally, I really like Tesla and by 2028, I wouldn’t be surprised if the automaker’s shares were sky high, but right now, I’m finding it hard to make a bet based on something that may not happen for 14 more years.)
Morgan Stanley’s base case also assumes that Tesla Motors Inc (NASDAQ:TSLA) becomes a “thriving” company with operating margins peaking at 16.4% by 2019 and then normalizing at 15%. They’re projecting a combined volume of almost 150,000 Model S and Model X units by 2020 and 220,000 Generation III units by 2020. By 2028, they are projecting 775,000 Generation III units.
Here’s a look at their summary of their model:
Tesla valuation makes no sense—yet
The analysts do agree that the valuation of Tesla Motors Inc (NASDAQ:TSLA) really is crazy right now. They say it just doesn’t make sense until “at least 2015,” so at least they aren’t denying the fundamentals. The automaker trades at more than five times 2015 estimated EV / sales and 43 times estimated 2015 P/E. And then when looking at valuation using near term earnings, Tesla looks even more expensive, which is why bears are basically freaking out and even some bulls are now starting to question their own sanity.
They also note that their discounted cash flow model valuation is extremely sensitive to three big variables: discount rate, EV / EBITDA multiple and terminal value. They say every 100 basis points of discount rate is worth about $35 to Tesla Motors Inc (NASDAQ:TSLA)’s share price around the 11% level they applied.
And every one turn of EV / EBITDA multiple they estimated to be worth about $18 per share of The company’s stock at the 11% weighted average cost of capital. Their terminal value calculation on their 15-year discounted cash flow model makes up more than 50% of their price target. Here’s a more thorough examination of their analysis using various terminal value methodologies.
Comparing bear and bull cases for Tesla
In case you’re wondering, Morgan Stanley analysts have certainly done their homework in preparing the report. It’s a very impressive 53 pages long and includes a bear case of $100 a share and a bull case of a shocking $500 a share.
DISCLOSURE: I have no position in any of the stocks mentioned.