Tesla Stock Forecast and Valuation
First Published date: 21. November, 2022Last Updated: 23. November, 2022Fact-checked by Adrian Müller
Table of Content
Tesla Stock Price – Live Trading Chart and Latest FinancialsÂ
Before reading this article, have a look at the current Tesla stock price chart showing key current and historical financials of the company. You may also expand the interactive menu options below to conduct your own analysis with additional technical indicators based on the actual market data!Â
Business Model of Tesla
The critical difference between Tesla’s business model and other automotive industries is that Tesla sells their cars directly and not through any franchise. They have 3 main revenue segments: automotive revenue, energy, and service.
Automotive sales are driven by the sales of 4 models: S, 3, X, and Y. In addition, Tesla allows customization of the cars, such as full self-driving software, which has given them a competitive advantage so far. Besides, they have the most superchargers globally, and Tesla vehicles can be charged in 15 minutes.
Tesla’s energy segment relies on selling solar panels and energy storage. This is still a tiny segment of their revenue. Tesla has been hit by supply chain challenges in recent months, affecting its storage business the most.
Lastly, their service revenue segment is an extension of their automotive sale. Tesla provides repair & maintenance, extended service plans, and the sale of used vehicles, components, and merchandise. These auxiliary components go hand in hand with their automotive sales, and revenue is expected to increase together with their automotive sales.
The downside is that Tesla only has negligible diversification in its revenue stream unless it can further monetize the AI bot they have introduced. Otherwise, it would be hard to justify Tesla as a technology company trading at a high forward P/E ratio when most of its revenue comes from automotive sales with a small percentage of energy sales. For tesla stock forecast, it would be more prudent to value them like a slightly better automotive industry instead of a technological software company.
Cost of equity
The capital asset pricing model (CAPM) can be used to compute the equity cost.
CAPM = risk free rate + (market risk premium x beta)
A risk-free return rate is the minimum rate an investor expects for an investment with no risk. Since every investment comes with a risk, the United States Government Bonds interest rates can be used as a reference as the United States Government is unlikely to default on its payment obligation. The average yield for 10 years of government bonds of 4.01% will be used as the risk-free rate. While it is debatable that 20 years and 30 years of government bond yield could be used as a risk-free rate, it is unlikely to differ too much from a practical standpoint.
(Adapted from Trading Economics website)
According to Statista, the market risk premium for the United States equity market is 5.60%. Thus, the market risk premium is 5.60%.
According to Yahoo Finance, the equity beta of Tesla is 2.13.
(Adapted from Yahoo Finance)
CAPM = 4.01% + (5.60% x 2.13) = 15.94%
Cost of debt
The cost of debt is the effective interest rate that will pay on its debt borrowings. Besides equity financing, which is the issuance of shares, debt financing is another way for the company to obtain external financing via bank loans. Since Tesla is an automobile company, it would have heavy capital expenditures to build the factories needed to produce vehicles.
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Based on the 2022 Q3 report, the interest expense in millions is $53, and the total debt borrowings are $3,553.
Cost of debt = Interest Expense / Total Debt = $53 / 3,553 = 1.49%
Weighted Average Cost of Capital
The weighted average cost of capital (WACC) is a company’s after-tax cost of capital from all external sources, whether through issuing common stock, preferred stock, bonds, or other types of debt like loans/bank borrowings. The WACC formula considers these and computes the average rate Tesla will pay for this financing. The rate is used for the Tesla stock forecast for 2026.
Based on the 2022 Q3 report, the total equity in millions is $39,851, while total assets are $74,426.
The equity financing ratio (E/V) = total equity / total assets = 39,851 / 74,426 = 0.54
The debt financing ratio (D/V) = 1 – 0.54 = 0.46
WACC = (E/V x Re) + (D/V x Rd x (1-T)
= (0.54 x 15.94%) + (0.46 x 1.49% x (1-9%)
= 9.23%
This means that for the Tesla stock forecast, Tesla has relied more on equity financing as their equity financing ratio is at 0.54 compared to their debt financing ratio, which is 0.46. In the current macroeconomic environment, being too heavily leveraged on debts would not be favorable for Tesla as the United States feds have been hiking their interest rates continuously in an attempt to reduce inflation. The high-interest rates would lead to a higher interest expense for Tesla, which would hurt their bottom-line earnings, potentially causing them to decide to reduce dividends or completely cut them. Ultimately, the Tesla stock forecast for 2026 would have a lower valuation in the future if their interest expense were to go up.
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Terminal Multiple Assumption
The terminal multiple is another method of calculating the terminal value. This method assumes that the business’s enterprise value can be calculated at the end of the projected period using existing multiples on comparable companies.
How it drives the computation of the DCF is that at the end of the 2031 forecast, we multiply the EPS by the terminal multiple to determine the company’s terminal value. How it drives the computation of the DCF is that at the end of the 2031 forecast, we multiply the EPS by the terminal multiple to determine the company’s terminal value.
I used the forward PE of the automobile manufacturers sector for this assumption, which is 24.2. As the current economic outlook is bearish, the forward PE for Tesla stock forecast 2026 used is 20 to be conservative. Tesla’s forward PE is at 54, although there would be a forward PE compression as Tesla is still growing their revenue heavily on a YoY basis. To be conservative, it would be safer to assume the forward PE of the automobile manufacturing industry. However, it is also debatable that Tesla is a technology company as they have introduced AI and self-driving.
Revenue/Profit Expectations for Assumptions
Cybertruck is geared for mass production at the end of 2023. Currently, there have been many orders for the Cybertruck. Elon Musk has mentioned that they stopped taking orders as they have enough orders to fulfill for the next 3 years once production starts. While this would not affect 2023’s EPS, it is expected to help grow EPS for 2024-2026. However, as Tesla’s backlog is beginning to shrink, they would not be able to grow their EPS as fast once demand starts to slow down. Hence, CAGR remains the same for the next 5 years due to anticipation of slightly lower demand, offset by Cybertruck production.
We will use the lower forecasted guidance of 15% revenue growth for normal case assumption. This is a conservative approach since lower revenue growth is used compared to Tesla’s historical revenue growth rate of 50%. A terminal multiple of 20 is used, which is also a conservative approach as the average forward P/E of the automobile manufacturer is 24.2.
For the best-case assumption, a 20% growth rate is used. A terminal multiple of 25 is used, assuming the macroeconomic is favorable, and the forward P/E is more optimistic. Tesla is trading at a forward P/E of 50+, which is expected to come down as EPS grows. Eventually, it should normalize at the average of the automobile industry.
Lastly, the worse-cast assumption assumes a 10% revenue growth rate. A terminal multiple of 15 is used and is also a conservative approach, as the average forward P/E of the automobile manufacturer is 24.2.
Discounted Cash Flow
Tesla Inc
Terminal Value
Growth rate
Scenario 1
EPS
2022
2023
2024
2025
2026
2026
15%
next 5 years
Normal Case
4.90
5.64
6.48
7.45
8.47
9.86
197.11
PV(9.23%)
126.77
9.23%
Discount rate
INTRINSIC VALUE
126.77
20.0
Terminal multiple
Terminal Value
Growth rate
Scenario 2
EPS
2022
2023
2024
2025
2026
2026
20%
next 5 years
Normal Case
4.90
5.88
7.06
8.47
10.16
12.19
304.82
PV(9.23%)
196.03
9.23%
Discount rate
Present value sum
196.03
25.0
Terminal multiple
Terminal Value
Growth rate
Scenario 3
EPS
2022
2023
2024
2025
2026
2026
10%
next 5 years
Normal Case
4.90
5.39
5.93
6.52
7.17
7.89
118.37
PV(9.23%)
76.13
9.23%
Discount rate
Present value sum
76.13
15.0
Terminal multiple
Scenario
Probability
PV
Part
Scenario 1 (normal case)
0.6
126.77
76.06
Scenario 2 (best case)
0.2
196.03
39.21
Scenario 3 (worst case)
0.2
76.13
15.23
Sum
130.49
Disclaimer: This is just for educational purposes and not for investing advice!
MADE BY: DarrenCarnell
The discounted cash flow is a valuation method that calculates the estimated intrinsic value of a company using its expected cash flows for the next 5-10 years. It is one of the most used valuation methods to determine if an investment is undervalued, fairly priced, or overvalued at its current stock price. In this case, it is used for the Tesla stock forecast.
For the Tesla stock forecast for 2026, the 5-year DCF is used. Based on the valuation, Tesla is overvalued at the moment. The company would have to beat expectations to achieve a fair value which is the best-case scenario of 20% CAGR growth for the next 5 years. While the Tesla stock forecast is just an estimation of the valuation, it does show a glimpse of what Tesla stock valuation is roughly worth, and the stock has remained overvalued despite the poor economic outlook.
Limitations of Discounted Cash Flow Method
The major limitation of the discounted cash flow method is that it involves the estimation of future cash flow and is not reliant on actual figures. There are lots of assumptions involved, and each assumption will lead to a different value as the analysis is sensitive to the variables that have been inputted. Some key assumption variables are the growth rate for the next 5-10 years, the discount rate used in the terminal value computation, the dividend payout ratio for each year (if any), and the terminal multiple.
This is one of the reasons it is safer to have 3 different scenarios in the discounted cash flow model: the normal, best, and worst. The average of the 3 scenarios will then be used to determine the company’s value. Furthermore, this can be adjusted by giving each scenario a higher or lower probability, depending on the macroeconomic environment. An example would be giving a higher probability to the worst-case scenario as high inflations worldwide and costs increase. This would slow down the economy, decreasing top-line revenue, and higher costs would lead to a lower bottom-line net income. Hence, the discounted cash flow must adjust for these special macroeconomic circumstances via downward adjustment.
The discounted cash flow method depends on how accurate the estimates are. The value projection would be useless if there were too many uncertainties surrounding the company. Besides that, the weight averaged cost of capital (WACC) formula also involves estimation, which is a difficult number to arrive at. If the company has irregular historical cash flow, it can be challenging to forecast the cash flow for the next 5-10 years.
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Reference
Average market risk premium in the United States from 2011 to 2021. Retrieved from
S&P 500 Sectors & Industries Forward P/Es (monthly, weekly since 1997). Retrieved from
https://www.yardeni.com/pub/mktbriefsppesecind.pdf
United States Government Bond 10Y. Retrieved from
https://tradingeconomics.com/united-states/government-bond-yield
Tesla. Retrieved from
https://finance.yahoo.com/quote/TSLA/
Annual Report 2021. Retrieved from
