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How to value Tesla is a hotly debated topic on Wall Street.
Xiaolu Chu/Getty Images
Valuing
Tesla
stock can be hard. Is it a tech company, just an auto company, or something in between? A famous finance professor has some help for investors. They might not like what he has to say, though.
Thursday evening, New York University’s Aswath Damodaran tweeted his updated valuation for
Tesla
(ticker: TSLA) stock. He thinks shares are overvalued, but not nearly as much as he did the last time he posted his assessment of the electric-vehicles leader. That’s the good news. The bad news is that he believes the company is worth less than it was in November 2021.
“I last valued Tesla in November 2021, just as its stock price was peaking, and found it overvalued by more than 50%,” wrote the professor. Back then he believed Tesla was worth about $640 billion. (Tesla’s market capitalization was well north of $1 trillion at the time.) He projected annual sales and free cash flow of about $410 billion and $47 billion by the end of the decade.
Now he’s updated his numbers to include the 2022 performance. Margins were better than he expected, but interest rates were up, which hurt valuations.
Any stock can be valued based on the stream of cash flow it produces. The cash flow is discounted back at, in essence, a rate of return that investors want to earn. As rates, and desired returns rise, the value of all the cash goes down.
“Incorporating the higher risk-free rates and risk premiums of 2023 into the valuation, while leaving the core fundamentals…relatively unchanged, the value per share that I got yesterday was $130,” added Damodaran. That values Tesla stock at about $480 billion, 25% lower than his number from 2021.
The professor didn’t change his sales estimates much. His long-term profit margin estimates didn’t change at all. He sees the company with 16% operating profit margins in the long run. Tesla’s operating profit margin in 2022 was 16.8%.
Damodaran, for his part, has taught tens of thousands of students at New York University’s Stern School of Business how to value stocks. Outside the classroom, he is one of the best-known experts on valuation, and is often a go-to source when people try to understand how a hot new company can have metrics that seem to defy conventional analysis.
Tesla falls in the difficult-to-value camp. It grows faster than any large American auto maker has in probably 100 years and it produces better profit and free cash flow metrics than any other car manufacturer on the planet.
For a long time, Tesla stock looked expensive on traditional valuation metrics such as price to earnings or price to sales. The brutal sell-off at the end of 2022 made Tesla shares cheaper than the average stock in the
Nasdaq Composite.
Tesla’s price-to-earnings (PE) ratio hit about 20 times estimated 2023 earnings early in the year. Stocks in the Nasdaq trade for about 22 times the estimated 2023 earnings on average.
Tesla’s PE ratio is currently at about 27 times estimated 2023 earnings. Shares are a little too pricey, according to Damodaran. He is no Tesla blind bear, though. His initial work, and updated valuation, implied that Tesla should be the most valuable car company in the world.
Bulls and bears can argue over his revenue and margin assumptions. The professor probably doesn’t mind. He even put his valuation model online so investors can adjust it for themselves—and hopefully learn something in the process.
Tesla stock has gained 12% to $179.65 at 2:29 pm Friday, while the
S&P 500
has risen 0.6%, and the
Dow Jones Industrial Averages
has advanced 0.4%. Tesla shares rose 11% Thursday after the company reported fourth-quarter earnings.
Write to Al Root at [email protected]