Tesla Motors Inc (TSLA): Aswath Damodaran Defends His Valuation

Tesla Motors Inc (TSLA): Aswath Damodaran Defends His Valuation
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Last week Tesla Motors Inc (NASDAQ:TSLA) fans were irate when NYU finance professor Aswath Damodaran posted a blog with his valuation of the company. He said that the automaker’s shares are tremendously overvalued, and today he wrote another post defending his valuation and explaining it even further.

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Tesla Motors Inc (TSLA): Aswath Damodaran Defends His Valuation

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He said last week that “Tesla would have Audi-like revenues and Porsche-like margins to conclude that the equity was worth $8.15 billion today.” He noted that many people were confused because Audi’s current market capitalization is $33 billion, and it would be a lot higher if the company had Porsche-like margins.

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He noted that in year 10, which is when he sees Tesla Motors Inc (NASDAQ:TSLA) having Audi-like revenues and Porsche-like margins, he estimates that the automaker would be worth $68.27 billion. He said in order to get from that expected future business value to today, investors have to take several drags on value into account.

Drags on Tesla’s value

Without going into a whole lot of detail (read Damodaran’s blog here if you want that kind of detail), the six drags he listed are: time value of money (a dollar is worth more today than it will be in 10 years); business risk adjustment; dilution or reinvestment adjustment; failure risk adjustment; net debt adjustment; and option overhang.

Adjustments to Tesla’s value

He also reassured readers that he was not trying to talk any of them out of investing in Tesla Motors Inc (NASDAQ:TSLA). He also said he wasn’t trying to start up another debate on the company’s value, but he did say that most of the arguments he heard from those who disagree with him about the automaker’s value can fall under one of three adjustments.

He said investors who think Tesla Motors Inc (NASDAQ:TSLA) can generate much higher revenues than he estimated while maintaining high margins are arguing that the $68.27 billion he estimated is too low and that it will be worth more than that in 10 years. Second, he said that some believe his adjustment for business risk is too high, which would also change the valuation estimate.

And third, he said the dilution and reinvestment adjustment may be the one area where “there is the most room for disagreement.” He assumed that since Tesla Motors Inc (NASDAQ:TSLA) is an automaker and that scaling up will require large capital investments. He said the main arguments he heard is that Tesla Motors Inc (NASDAQ:TSLA) will be able to create a model in which it licenses technology or focuses on power train and battery sales rather than car sales.

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Michelle Jones is editor-in-chief for ValueWalk.com and has been with the site since 2012. Previously, she was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Email her at Mjones@valuewalk.com.
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