A Discounted Cash Flow Model on Tesla (2024)

Tesla’s latest earnings report indicates growth in both vehicle production and deliveries, with a 38% year-over-year increase in deliveries to 1.81 million vehicles in 2023. Production also grew by 35% year-over-year to 1.85 million vehicles. These figures highlight Tesla’s scale-up in operations and delivery capacity, which are key drivers of its growth. The company’s ability to increase production and deliveries despite the global supply chain challenges underscores its operational efficiency and the strong demand for its electric vehicles. Additionally, Tesla’s investment in new models and technology, like the Cybertruck, is expected to further drive growth and innovation.

Tesla’s significant year-over-year growth in vehicle deliveries and production in 2023 is a testament to its expanding operational capabilities and the escalating demand for its electric vehicles. The introduction of new models, like the Cybertruck, represents Tesla’s commitment to innovation and diversification of its product lineup. These developments are likely to bolster Tesla’s market position in the electric vehicle industry and enhance its long-term growth trajectory

Evaluating Tesla (TSLA) stock involves a nuanced understanding of its financials, market position, and the broader electric vehicle (EV) industry landscape, especially given its performance and expectations into 2024. Here are the key points to consider when assessing Tesla as an investment:

Reasons Tesla Might Be Considered a Good Stock

1. Long-term Growth Potential: Despite Tesla’s recent challenges, some investors and analysts remain optimistic about its long-term prospects. The company’s ability to generate substantial revenue from a mass-market EV model lineup is seen as a potential growth driver. For instance, Tesla is planning to start production of a new mass-market electric vehicle, code-named “Redwood,” in mid-2025, aiming to include an entry-level $25,000 vehicle model. This could significantly impact the global EV market, underscoring Tesla’s long-term value proposition.
2. Brand and Market Leadership: Tesla continues to be a leading name in the EV sector, benefiting from a strong brand, innovative technology, and a growing global footprint, including expansion into new markets and scaling up of production capabilities.

Tesla’s Limitations:

1. Increased Competition: Tesla faces growing competition from established automakers and new entrants in the EV market. Companies like Ford, General Motors, Rivian, and BYD Company are releasing competitive EV models, which could challenge Tesla’s market share and pricing power, especially in key markets like China.
2. Financial and Operational Challenges: Tesla’s financial performance has shown signs of pressure, with a significant drop in non-GAAP EPS year-over-year and warnings from Elon Musk about potentially lower vehicle volume growth in 2024 compared to 2023. These concerns, combined with Musk’s comments on the competitiveness of Chinese automakers, have contributed to volatility in Tesla’s stock price.
3. Valuation Concerns: Tesla’s shares trade at a premium compared to other automotive OEMs, reflecting its positioning as a tech-forward company. However, this high valuation comes with expectations for continued high growth, which may be challenged by increased competition, market saturation, and operational headwinds. Analysts have expressed concerns about Tesla’s revenue growth and margins, leading some to recommend a sell position based on expected financial performance in 2024.
4. Elon Musk’s Influence: Musk’s public statements and social media engagement have been known to cause fluctuations in Tesla’s stock price. His comments can sometimes introduce uncertainty and volatility, impacting investor sentiment and potentially affecting the stock’s performance.

Analyst Recommendations

As of the latest analysis, most Wall Street analysts recommend holding Tesla stock, with a mixture of strong buy, buy, and sell recommendations. The average price target suggests a modest upside potential from current levels, indicating that while there are growth prospects, there are also significant uncertainties and challenges that could affect the stock’s performance.

In conclusion, Tesla’s investment case is complex, balancing significant growth opportunities against operational, competitive, and market challenges. Investors considering Tesla need to weigh these factors carefully, keeping in mind both the company’s pioneering role in the EV market and the potential risks from increased competition, valuation concerns, and operational headwinds.

The forecast presents Tesla’s expected financial performance, projecting a steady revenue increase from $96,773 million in 2023 to $188,529 million by 2028, with growth rates gradually declining from 19% to 15%. Costs of goods sold are anticipated to decrease as a percentage of revenue, improving from 82% to 63%, reflecting potential operational efficiencies or economies of scale. Meanwhile, operating expenses, as a percentage of revenue, are expected to remain consistent, indicating stable management of these costs relative to business growth.

Research and Development costs are also forecasted to hold steady at 4% of revenue, underscoring a continuous investment in innovation. Interestingly, the net profit margin is projected to expand from 15% to 24%, which may suggest increased profitability through enhanced revenue streams or cost optimization strategies. Overall, the tax rate is expected to stay constant at 17%, while net interest and other expenses maintain a 1% share of revenue, suggesting a stable financing structure.

Tesla’s capital expenditure (Capex) strategy, as delineated in the projections, indicates a robust commitment to investment, with an annual increase maintaining a constant ratio of 10% of revenue from 2024 to 2028. This sustained investment rate points towards a strategy for growth and expansion, underpinned by significant capital outlays in previous years, such as $8,014 million in 2021 representing 15% of revenue. The depreciation and amortization schedule, with a total increasing from $7,455 million in 2024 to $14,086 million in 2028, reflects the substantial investments made in prior years, especially the notable increments in Capex from $1,434 million in 2022 to $1,990 million in 2024. This is aligned with a strategic utilization of assets over an average useful life of 5 years, allowing for a steady absorption of the investment costs over time. The historical 5-year average Capex of 9.8% of revenue demonstrates a consistent level of investment, which is projected to continue. These financial plans illustrate a clear trajectory for Tesla’s infrastructure and asset development, ensuring future capacity and capabilities align with anticipated growth.

The Discounted Cash Flow (DCF) model for Tesla indicates a robust growth trajectory with the present value of Free Cash Flows (FCF) increasing from $11,435 million in 2024 to $494,602 million in the terminal year. This is reflective of efficient capital allocation and operational scaling, as depicted by the increasing EBITDA over the projection period. The Weighted Average Cost of Capital (WACC) is set at 8.2%, indicating the company’s cost of financing, and a long-term growth rate of 4.0% suggests confidence in Tesla’s sustainable growth beyond the forecast period.

Changes in Net Working Capital (NWC) show fluctuations, with a notable reduction in 2027 followed by an increase in 2028, potentially indicating variances in operational efficiency or changes in sales and payment cycles. Days of receivables are consistent at 13, while days payable shows a slight decline over the years, suggesting improved payment terms with suppliers or better cash management.

The enterprise value of $583,777 million in 2024, factoring in a terminal value representing 84.7% of the total, and an equity value of $607,641 million after adjusting for net debt, results in a fair price of $191 per share, offering a comprehensive view of Tesla’s intrinsic value through the lens of its projected financial operations.

Discount Rate: The chosen Weighted Average Cost of Capital (WACC) of 8.2% reflects the expected return from investing in Tesla, accounting for both the time value of money and the risk associated with the investment.

Terminal Value: A significant portion of the intrinsic value in DCF comes from the terminal value, which assumes cash flows will grow at a consistent rate, in this case, 4%. This rate is used to estimate the company’s value beyond the forecast period, indicating expectations of Tesla’s continued growth and success.

Growth Rates: The use of growth rates in the DCF model is informed by historical performance and industry trends, with the expectation that Tesla will continue to grow at a healthy rate due to its innovation and market position.

Profitability and Cash Flow: Tesla’s strong profitability and cash flow generation, as seen in recent years, provide a solid foundation for the positive valuation. The forecasted increase in free cash flow over the years signals confidence in Tesla’s operational efficiency and market strategy.

Market Sentiment: Despite current market conditions, which have seen Tesla’s valuation as overvalued according to some analyses, the DCF fair price is justified by the company’s strong fundamentals and growth prospects.

Competitive Advantage and Innovation: Tesla’s significant investment in R&D and Capex is expected to maintain its competitive advantage in the electric vehicle market, which is essential for long-term growth and justifies a higher valuation.

Volatility and Market Risks: While the stock’s volatility and macroeconomic risks such as decreased tech spending are noted, the DCF valuation is based on Tesla’s ability to maintain its growth trajectory and manage these risks effectively.

Validation of these factors highlights that Tesla’s strong performance and growth potential warrant an optimistic valuation. However, it’s also crucial to consider that different analysts might have varying opinions on the fair price of Tesla’s stock based on their projections and assumptions used in their DCF models. The DCF valuation, therefore, should be viewed as one of many tools in an investor’s arsenal for making informed decisions.

Tesla’s innovation and growth can be contextualized by examining its competitive landscape and comparing its strategies with those of its main rivals in the electric vehicle (EV) market.

BYD: BYD has achieved a competitive edge through vertical integration, notably by manufacturing its own batteries. This allows BYD to ensure a stable supply chain and reduce costs, while Tesla mainly relies on third-party suppliers for batteries. Additionally, BYD targets a broader market by offering more affordable EV options, which differs from Tesla’s premium positioning.

Rivian: Rivian is distinguishing itself in the EV space with vehicles known for their off-road capabilities and luxury features, such as the R1T electric pickup truck and the R1S electric SUV. Rivian’s direct-to-consumer sales model and a commitment to delivering 50,000 vehicles in 2023 also position it as a notable competitor.

General Motors (GM): GM aims to dethrone Tesla as the leading EV seller in the U.S. by the mid-2020s with a $35 billion investment plan through 2025. Their aggressive rollout plan includes launching 30 new electric vehicles globally by 2025 and achieving a zero-emissions lineup by 2035.

Toyota: Toyota is set to expand its presence in the EV market with plans to sell 1.5 million EVs per year by 2026. Bank of America sees Toyota as a potential rival to Tesla, given its reputation for reliability and quality.

Ford: Ford’s commitment to the EV market is demonstrated by its investment of $50 billion in EV models by 2026. Their Mustang Mach-E and the F-150 Lightning have both been well-received, with the latter attracting new customers to the brand.

Lucid Motors: Founded by a former Tesla executive, Lucid Motors has entered the luxury EV market with its Lucid Air sedan. It boasts advanced technology, exceptional range, and ultrafast charging capabilities, presenting itself as a direct competitor to Tesla’s Model S.

Volkswagen Group: With brands like Audi, Porsche, and Volkswagen, the VW Group is preparing to challenge Tesla with electrified vehicles such as Audi’s e-Tron, Porsche’s Taycan, and Volkswagen’s ID.3 and ID.4, which aim to make electric cars more accessible.

Polestar: As Volvo’s electric subsidiary, Polestar is focusing on high-performance, sustainably-designed electric vehicles. The Polestar 2 competes with Tesla’s Model 3 in the luxury compact sedan market.

Tesla’s key investment drivers include its pioneering status in the EV market, constant innovation in technology, and a well-established supercharger network. Its brand recognition, bolstered by Elon Musk’s vision, continues to play a significant role in its growth. While competitors are rapidly catching up with their own innovations and strengths, such as NIO’s battery-swapping technology and Lucid’s claim of extended range, Tesla’s ongoing investment in R&D and its ability to scale production while maintaining quality are crucial for maintaining its market leadership position.

As the EV market grows, Tesla’s innovation is driven by its commitment to sustainability, performance, and technology leadership, including developing advanced battery technologies, expanding its global supercharger network, and advancing autonomous driving capabilities. The competition is intensifying, but Tesla’s first-mover advantage and ongoing investments in technology and infrastructure position it well to maintain a significant role in the industry’s future.

Disclaimer: This is not an Investment Advice. Investing and trading in currencies involve inherent risks. It’s essential to conduct thorough research and consider your risk tolerance before engaging in any financial activities.