Good Time To Invest In Tesla?

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As the automotive industry experiences the growing pains of the next-generation leap to electric vehicles, Tesla (TSLA) has emerged as the nascent leader in a volatile, unpredictable shift. It interests us to conduct analysis of the firm’s value as a whole, analysis of our calculations, and ultimately, a recommendation regarding not only an acquisition of Tesla but also regarding our general expectations for the industry overall.

Comparable Multiples

Comparing Tesla’s price multiples to that of its competitors helped us determine whether or not the company would make a worthwhile investment.

Free Cash Flow (FCF) Valuation

According to our calculation, Tesla’s FCFF is negative at -$1.689B. The negative FCFF suggests that Tesla has not produced enough revenue to recover its costs and investment activities. This means that since there is no cash is being put into the Retained Earnings account, none can be reinvested to grow the company. Their lack of ability to produce internal cash sources could force them to seek external creditors, which would heavily increase the debt.

Value of the Firm

At a price of approximately $190 on the date of this writing, there is no doubt that the market is paying dearly for value and success that may or may not actually come to fruition. It is no secret that Tesla has never turned a profit; that its earnings and assets are extraordinarily low relative to its earnings; that its earnings per share are dismal, hovering at around -2.80%. Indeed, according to virtually every measure, Tesla is a value catastrophe.

Analyst Expectations

According to Yahoo! Finance, while analysts expect the firm to grow at a rate of more than double per annum over the next five years - specifically, a rate of 101.27% - and, even more incredibly, at a rate of 237.50% for next year alone, expectations for this year are a staggering -1,014.30%. These numbers can be shocking to reconcile.In large part, we attribute the projection for the coming year to plummeting oil prices. In the last year alone, crude oil prices have collapsed by more than half. And while hugely beneficial to conventional automakers, this factor practically eliminates the competitive advantage of the entire Tesla product line. However, like the five-year projection suggests, it is not all bleak. We concur with these projections as Tesla brings its state-of-the-art Gigafactory online in late-2016 or early-2017, which will be instrumental in achieving the economies-of-scale so critical for cutting edge battery technology. This has thus far eluded the company, and as a result, costs are high and margins are low. In fact, Tesla has released a statement that it expects these new production techniques to reduce battery pack production costs - the most expensive component in the vehicles - by approximately 30%. As Tesla can produce its product line with a more mainstream customer in mind, and as oil prices make what can only be an inevitable rally over the next several years, the potential for Tesla to soar is ripe.Additionally, Tesla’s growth is expected to outpace that of the automotive industry by approximately 85% each year. This is not unlikely, as Tesla has far outpaced the American and Japanese giants in its bid for an all-electric future that has been embraced by the eco-conscious, tech-savvy younger generations in a way reminiscent of the early days of Apple. Should these projections prove accurate, Tesla’s revenue will skyrocket more than 30-fold, from less than $1B in 2015 to approximately $31B in 2020.

Summary

Given the broader picture beyond simply comparing intrinsic to market value, we cannot recommend a purchase at this time. This price would be paying dearly for success that may never come to pass, and while the potential for remarkable growth is there, the numbers are too conflicted - even contradictory in some places - to make a strong case for any kind of acquisition at this time.

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