Valuation of Tesla Inc. Is the Share Price ($418) as of 31st December 2019 Based on Fundamentals? A Discounted Cash Flow (DCF) Valuation Approach Accompanied by a Real Options Valuation (ROV)

Fatih Kemal Yilmaz

Student thesis: Master thesis

Abstract

The purpose of this paper is to assess whether the price of one Tesla share as of 31st December 2019, $418, is based on fundamentals. To address this research question, an overview of the industry specific outlook and trends will be provided. This will be followed up by an in-depth analysis, touching upon external as well as internal factors that might affect Tesla’s business case and to identify sources for value creation. A financial statement analysis will round up the analysis and set the basis – together with the insights from the strategic analysis – for the projection of future cash flows. This will be done according to management guideline as well as historical performance. After determining the weighted average cost of capital (WACC) that is based on various assumptions, using a discounted cash flow (DCF) model the equity value as of 31st December 2019 will be assessed. The DCF model will be augmented by determining the option value for Tesla’s robotaxis project, an autonomous car sharing initiative. For this initiative to be realized, Tesla first has to achieve full self-driving capability (level 5 autonomy) and gain the approval of the regulators. Tesla is a well-established player in the electric vehicle segment and is ahead of its competitors when it comes to the battery range as well as battery costs per kWh, autonomous driving and overall product performance. However, the well-established players are gradually entering the electric vehicle market and could catch up with Tesla as they have more resources and scale and scope advantages. By moving from just being a high-premium car manufacturer (Roadster 2008, Model S & X), Tesla launched two more affordable models, Model 3 & Y (2017 & 2020). However, Tesla is expected to have high CAPEX in the next the fiscal years, ≈$3.5bn per year. This is necessary to build the production plants for the upcoming models Semi, Roadster and Cybertruck. Hence, Tesla starts to cover the major forms of terrestrial transport, as mentioned in the second part of Tesla’s master plan in 2016. Estimating the WACC to be 6.87% and applying the DCF model, the computed share price for Tesla as of 31st December is $1638 leading to a total market capitalization of $296.4bn. Considering the option value ($42bn) for the robotaxis project a share price of $1,870or a market cap of $338.5bn is achieved. While the share price is almost four-times the closing price of 31stDecember 2019, Tesla’s currently traded share price provides further validity for this estimation.

EducationsGraduate Diploma in International Business, (Diploma Programme) Final Thesis
LanguageEnglish
Publication date2020
Number of pages94