Tesla valuation suspense

Tesla, an electric car company based in Palo Alto, Calif., Has seen sharp price swings recently. The company’s market value once exceeded $ 160 billion, more than 75% more than General Motors and Ford combined.

On the morning of February 13th, Tesla announced the issuance of $ 2 billion in shares, and the stock price rose nearly 5% that day. This was an extraordinary reaction when a company sold shares and diluted existing shareholders’ equity.

How much is Tesla worth?

David Erickson believes that the answer depends on many factors. Erikson is a senior research fellow in finance at Wharton School of Business, co-teaching a course on strategic equity financing. Prior to teaching Wharton, he worked on Wall Street for more than 20 years, helping private and public companies with strategic financing.

In the first three trading days of February, Tesla’s stock price rose by about $ 130, then rose by $ 100, and finally fell by more than $ 150. For a stock index, such fluctuations in the price of the US dollar are not uncommon, however, for a company with a market value of more than 100 billion US dollars, such extreme fluctuations are unprecedented.

So what happened?

Five types of explanations
The following theories may help explain what is happening:

Mass “Short Squeeze”
According to the Wall Street Journal, short sellers have lost more than $ 8.4 billion since January, and more than $ 2.4 billion in the first week of February trade. For the past few years, Tesla has been one of the most shorted stocks in the US market (at the beginning of February, it was also the most shorted stock among all American stocks).

Interestingly, Tesla CEO Elon Musk has been taking a relatively positive attitude towards these “short-selling investors.”

“Fear of Missing Out” (FOMO), especially when fourth-quarter results are better than expected
Tesla reported better-than-expected Q4 results at the end of January. Tesla has set high expectations over the past few years and often fails to achieve them.

Another theory of FOMO theory is that Q4 is also the second consecutive quarter of profit. This means that once it has 4 consecutive quarters of profit, Tesla will be eligible to be included in the S & P 500 Index (S & P 500). S & P 500 is the world’s largest stock index and one of the world’s most sought after indexes.

Among the S & P 500 constituent stocks, the median company has a market value of about $ 55.6 billion. If the S & P 500 is used as a benchmark, Tesla will become an important candidate for investors.

Quantitative-driven Funds
Tesla’s stock showed great volatility and trading volume in the first week of February. As a result, many quantitative funds “jumped on the screen”, surfaced, and promoted Tesla’s trading to be more active and led to special The trading volume of Sierra stocks in the first three days of February was so large, reaching approximately 148 million shares, equivalent to its usual 15 trading day trading volume.

Purchasing power of ESG investors
Blackrock, the world’s largest asset management company, emphasized in its mid-January CEO’s annual letter that in the future they will focus on ESG (Environment, Social Responsibility, Corporate Governance) investments in the environment, sustainability and governance This obviously brings more benefits to companies like Tesla, which are considered to meet the ESG standards. In addition, the ESG investment market now has a size of more than 30 trillion US dollars, which provides long-term support for ESG’s investable targets.

Tesla “Bulls” get more solidarity
Supported by Tesla’s strong Q4 results, several analysts raised their tuning and price targets. Tesla’s most optimistic analyst, working for ARK Invest, a smaller asset manager, raised his target price for 2024 from $ 6,000 to $ 7,000 per share.

On February 4, before the U.S. stock market opened, long-term investors in Tesla (also one of its largest shareholders), Ron Baron, founder and CEO of Baron Capital, The US Consumer News and Business Channel (CNBC) predicts that Tesla will reach $ 100 billion in revenue in 4 years (Tesla’s report shows that revenue in 2019 is $ 24.6 billion), reaching 10,000 by 2030 Billion in revenue.

This is not Barron’s latest forecast, and Ark analysts have also been super optimistic for some time. Nonetheless, the positive results of the joint Tesla’s better-than-expected results have provided more support for the stock price that is ready to go.

Although Tesla’s stock price fluctuations are the result of a combination of these factors, some explanations still sound a bit far-fetched.

One explanation is that investors have been buying Tesla stock continuously because they expect Tesla to be included in the S & P 500. In fact, the potential inclusion index needs at least two more quarters, and Tesla does need to be included. In other words, a company in the S & P 500 index must be removed from the index by mergers or acquisitions or other events in order to add another company.

Theories about the power of ESG investors are also unconvincing.

The approximately $ 30 trillion in ESG investment management is not new money, it was there before. Some investors may make the point of view of FOMO, and for many growth investors, similar points may be made.

In addition, according to data from Yahoo Finance, the ESG risk score (measured by the sustainable ESG risk rating) Tesla ranks only at the 59th percentile, which means that only in terms of its ESG qualifications, Tesla’s stock may not be the first choice for ESG investors.

Six major variables
Since 2020, Tesla’s stock price has risen by more than 85%, and almost 150% over the same period in 2019. The company’s stock price has undergone a major revaluation.

However, some key issues remain, including:

Is Tesla’s management stable?
In the past few years, Tesla has witnessed the departure of Dion veterans. Although Elon Musk is a great dreamer, he also needs a strong team to help Tesla move forward.

In addition, Musk has also experienced various situations in recent years, including problems with the US Securities and Exchange Commission, and several times failed to show the best judgment. As Tesla’s stock price continues to rise, investors’ concerns about Musk seem to have eased, and expectations for the future have risen.

What is Tesla’s competitive environment? Is its first mover advantage sufficient?
Tesla has a considerable share of the global electric vehicle market, but there are still a large number of potential competitors, such as BMW, General Motors (GM), and Toyota.

Those who are bearish on Tesla seem to think that these old-time competitors in the traditional automotive sector will pose a threat to Tesla’s main market share because they will cut costs to expand their share. On the other hand, Tesla’s bulls believe that Tesla has established an important first-mover advantage, that is, a very good “moat”, which has more efficient production and distribution than major car manufacturers. .

Will Tesla be the Apple of 2001? With the successive launch of iPod and iPhone, Apple changed the rules of the game and continued to develop and expand market share; or Netflix? The latter is a pioneer of content streaming, and is facing huge threats in the process of constructing content. Disney, which has a large amount of content and has sufficient funds, has become increasingly aggressive.

The US tax credits are about to expire and the Chinese market faces potential risks. How will this affect their demand?
Beginning at the end of 2019, the United States will gradually cancel the tax credit subsidies for Tesla cars. The question in the minds of some investors is whether the strong performance of Tesla Q4 is affected by the increase in demand caused by the gradual cancellation of tax exemption policies? If it does, will it have a material impact on declining demand in 2020?

In addition, the continuity of China’s tax credit policy (which has been halved in the summer of 2019), the severe impact of trade disputes, and the economic impact of today’s terrible newcomer virus (and its potential costs) may also affect China’s demand, After all, China is expected to be Tesla’s largest market in the future.

What is the future capital expenditure?
Tesla generated positive free cash flow in 2019 after sharply reducing capital expenditures to $ 1.3 billion, compared to $ 2.1 billion in capital expenditures in 2018, and its initial guidance was projected capital expenditures in 2019 $ 2 billion to $ 2.5 billion, but considering all new product lines (electric pickups, semi-trailers, etc.), this question remains.

What is Tesla’s future capital expenditure? How will this affect cash appreciation in the coming years?

Does Tesla need more money?
This may seem less obvious after the equity transaction they just announced. However, is a $ 2 billion really sufficient for a company that has achieved positive cash flow in the first fiscal year (in a way that cuts capital expenditures)? What about its aggressive expansion plans (both in terms of new product lines and more manufacturing capabilities)? What about its very near-depletion situation in recent years?

The current stock price, combined with the volatility of its own stock, has provided Tesla with far greater potential funding flexibility than ever before. Considering that Tesla has used convertible bonds in the past, they can also easily obtain some relatively cheap debt-like financing.

A maxim we use in our strategic equity financing course is that companies should “raise funds when you have the ability, not when you have to.” Unfortunately, “when you have to do this,” it often costs more money (and uses more cumbersome terms), and in several very challenging situations, financing may not be available at all.

From a valuation perspective, how much is Tesla worth?
At present, Tesla’s stock is trading at a 33 times price-earnings ratio (EBITDA estimated at Enterprise Value / 2021, Enterprise Value / 2021E EBITDA), and the so-called “FANG” (FANG stocks, namely Facebook, Amazon, Nafi, Google, etc.) The acronym for tech companies, a term coined by CNBC host Jim Kramer in 2013 to refer to four companies) has a significant premium on Tesla’s stock price. With the exception of Netflix, the remaining three companies trade at similar multiples. The expected growth rate of EBITDA is also similar, and the expected profit rate is significantly higher than Tesla.

Can Tesla’s stock continue to “charge” the market? Its shareholders hope so. In particular, Musk, with the equity he has on hand and the billion-dollar options negotiated in 2018, he hopes to keep jumping “Electric Shuffle”, just like he posted on Twitter in January, That was done at Tesla’s Shanghai plant.