Valuation of Tesla Motors

Andreas Roland Petersen

Student thesis: Master thesis

Abstract

The objective of this paper is to examine if the increase in the stock price of Tesla Motors (Tesla) is justified in the fundamentals of the company. The various ways of valuating a company is explored with a focus on the discounted cash flow and economic value added method. The application of these two valuation methods require estimation of cost of capital. There are various components to account for when calculating cost of capital and therefore a review of the subject is deemed relevant. The paper is divided into five parts. The first part is an introduction to the valuation theories and a reasoning for choosing DCF and EVA. The second part is a thorough walkthrough of the discount rate and a calculation of it. The third part is an analysis of the industry to estimate future growth and a financial analysis to understand the fundamentals of Tesla Motors. Subsequently, this leads to the valuation of Tesla Motors, and the findings of the valuation are evaluated and discusses in the fifth part of the paper.
In the first part of the paper, valuation approaches are examined as well as the methodology behind them. From this examination the discounted cash flow and economic value added method are considered appropriate. The second part of the paper follows up on the valuation methods and focuses on the determinants of the correct cost of capital. This part finds that the cost of capital for Tesla is 5.84% which is lower than the average of the industry of 6.22% (Stern Business School, 2016). The third part evaluates the potential future growth for Tesla, and find it to be promising. The future launch of medium segmented cars and a reduction in production cost with the Gigafactory provides Tesla with the opportunity to entrench itself in the automotive industry. With a historical compounded average growth rate of 103% for the last five years it is estimated that Tesla will grow to a significant size within the next decade. Based on these estimates, a valuation is carried out, and it is estimated that the valuation of Tesla is 0.82% over market price when discounted cash flow method is used and valued over market price with ~2.55% when economic value added model is used. The last part of the paper tests the sensitivity of the valuation for changes in essential components the discount rate. It is demonstrated that the models are very sensible to assumptions of the discount rate.

EducationsMSc in International Business, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2016
Number of pages83