Tesla: A Disruptive Force with a Debt Problem?

[@askchrishetrades]

Just found your blog and this channel via your blog being mentioned in the Barron's this weekend. Can't wait to watch every video and read the blog. MBA Grad here

[@DAB009]

This is the kind of video that i would like to see throughtout my MBA. Excellent Information, Excellent content.

[@jyfromcq]

Hi Professor, thank you for posting the video. I have always enjoyed your analyses and lectures. One comment on Tesla going forward, I suspect that it will be more categorized as an automobile company rather than a technology company, which in turn justifies the rationale behind Tesla's issuance of more debt. One thing we tend to forget is that automobiles are a form or technology no matter how dated the technology has become in our present day. What Tesla is doing is to transform the auto industry with new technology. It brands itself as a technology company in the beginning but it aspires to become an automobile company just like Ford when it matures. I get this sense when I find out that Tesla is even thinking about making pick up trucks in the future. Any feedback is much appreciated. JY

[@sandeepvk]

Hi Aswath, I think you should look at this segment very differently. Tesla isn't competing Toyota or Ford or GM, they are competing BYD, Kia etc the more pure play players. Like, Nokia, the traditional car companies will never be able to cannibalise there own segment to create a new product.

[@sahilattri3388]

Professor, i am looking forward to see your updated tesla valuation .Since now its almost debt free company and also ROI has started to appear in its balance sheet with 2M capacity by year end . Also i Would love to hear about how you looking at current management and their credibility to reinvest future cash flow in the business.

[@rsharmak]

Hi Aswath, Thanks for a wonderful video. A comment and two questions. First, Tesla has a "lousy" set of covenants in this bond offering, according to a Bloomberg report that quotes bond strategists. So, maybe, the company knows what it is doing. First question: beyond the optics of Tesla as a tech company, what are some drawbacks to the company using debt (like the auto industry) to fund its Model 3 assembly plant? Have auto majors run into problems with this strategy? Second question: What effect will have a fresh issue have on Tesla's overheated stock and its capital raise?

[@AswathDamodaranonValuation]

Remember that no one has subscribed to the bonds yet. So, this may affect the interest rate on the bond. Second, it is not the optics that should worry you, but the contractual obligation. Auto companies that used debt were much more established at the time that they did. Tesla is like a young tech company, not a mature auto company. Third, who knows but equity investors seem to have a high tolerance for Tesla missteps and equity issuances (they issue stock to compensate employees all the time).

[@rsharmak]

Thanks. I will be sure to track the interest rate on this offering. In the meanwhile, this article states that Tesla has already raised $600 million. www.bloomberg.com/news/articles/2017-08-08/musk-revs-up-tesla-bond-buyers-by-selling-them-debt-with-dream

[@portfoliopal5279]

Great valuation article Sir! I got a very good insight about Tesla's real picture. Thanks for sharing this video.

[@rjpruitt]

I've looked at your valuation spreadsheet. Is there an area where you break down the revenues for each line of business? For each likely additional line of business in the future (i.e. Semi Trucks)? Maybe I just didn't see it. Thanks.

[@redcae1911]

Very good presentation . Thanks professor Aswath

[@aiyanash8027]

I'm a 17 year old high school student who hopes to go to nyu next year, and I have been watching your videos and talks for a while now. I manage my dad's IRA and return a great amount annually (30%), and our most successful investment has been Tesla, we bought Tesla at a price well below the fair value of your valuation of Tesla as a car company ($180, and I didn't watch your videos at the time that we had bought the stock) so I have been following the stock heavily for a long time. While your valuation is great, to the point that i had to change some numbers on my own previous valuation doe to some points made in this valuation, there is one fundamental part of Tesla's operation and valuation that Tesla's bears, and even you, to some extent, have failed to point out, and that is that Tesla is also an energy company that is currently disrupting utilities and oil companies. If you haven't already seen Tesla's solar products I suggest you see them again before valuing the company because their solar products will be widely adopted, as they provide a fair value, and are to be released surprisingly far before the model 3 with demand so large that Elon Musk had to put a limit on how many solar roof panel installations can be booked until it's release. These make Tesla's future revenues much larger, increase profit margins and operating margins, while decreasing the discount rate (as energy companies provide a constant stream of revenues and positive earnings, even through economic downturns, unlike car companies.) Another point that would be plausible is that when Tesla starts charging more money for their superchargers they will make money like an oil company, but with much higher margins (as they wouldn't have to dig for energy, unlike oil companies, which saves the a large amount of money), and these superchargers are so superior to other electric chargers that even the owner Tesla's automotive competitors, if they will be allowed to charge, will use them for the premium that Tesla charges. However, in this specific case, they will charge Tesla owners significantly lower prices to charge at superchargers compared to Tesla's competitors. If you plan on factoring in these points in a future valuation I would be very interested to see what you come up with.

[@aiyanash8027]

Also, I would like to add Tesla's future production of the model y, the pickup truck, and the 18 wheeler truck that Tesla plans on developing should be included into future valuations.

[@tahamaddam7415]

As Aswath mentioned, why not you download the valuation excel and make changes yourself to see how much it increases the value with your inputs.

[@deodatlawson8877]

Hope u sold TSLA when it hit $2k/share

[@aiyanash8027]

Deodat Lawson i sold it way before, it turned out to be a fraudulent company, i invested in STNE instead, made a lot of money there.

[@deodatlawson8877]

Aiyan Ash fraudulent or not, money is money as long as i get my gains, I ain’t complaining🤫🤫🤫

[@sandeepvk]

I think the valuations should be viewed from a long term perspective. Tesla, can't scale to building cars like Apple builds its iPhones. Neither, can they outsource their, work to China as Elon Musk mentioned in a recent interview that the sourcing cost were much higher from China than from US. I think they are more of a threat to Daimler and Audi than they are to Toyota or GM. Eventually, Tesla will become the iPhone ( perhaps more niche than Apple) of car industry. They will remain an aspirational car for most people, and they will shift focus on quality than quantity. I think a company like BYD might be the eventual roadrunner in the mass market segment.

[@JapaneseStockInvestor]

Thanks for your work! From Japan.

[@MM-yq2mc]

Very fair and valid points. The customer loyalty is definitely there and the model 3 is poised to be a game changer. If the logistical challenges can be overcome, Tesla is ready to post increasingly growing revenues and better margins within the next five years. Albeit a big market correction, which may dry up capital inflows, Tesla should see an even higher valuation in the coming time.

[@morizio2020]

thank you.. for sharing your knowledge... greetings from Jakarta..

[@Nandreu23]

Extremely interesting and clear video. Really appreciate it, thanks for the effort!!

[@adtrgnanasir787]

can there be a JV between BMW and TESLA to reduce the debt burden and overcome the manufacturing capacity to break even earlier than expected as both companies have potential synergies? then the existing valuation can sustain.

[@jasoncollins7754]

excellent video

[@Johnny54321]

Hi Professor,I have some questions as follows: I notice that, from the first valuation to the current one, you keep reducing the revenue growth from 70% in Sept 13 à65% in July 15 à50% in July 16 à 35% in August 17. I think that is because you have revenue target (year 10) to be like Volvo in 2013, $80b in July 2015, $80b in July 2016, and $100b in August 2017. So somehow you have to adjust the growth rate accordingly because the revenue from the base year keeps improving (i.e. $1,328à$2,013à$4,253à$10,069) Say if I make a following assumption. See if you think it is conservative enough. I assume that Tesla 10 years from now will have the revenue as much as Ford TODAY (NOT FORD IN 10 YEARS). I see $153,596b according to your table --Largest Auto Companies (Market Capitalization) on August 9, 2017.So I follow your approach adjusting the growth rate. The growth rate that is consistent with 150K in year 10 is about 45%.And with that rate I got the intrinsic value of $351 per share now which is about the same as the current market price. So do you think that the assumption that given 10 years Tesla can earn the same revenue amount that FORD is earning right now is too optimistic?But if you think that my assumption is actually conservative, perhaps it also means the stock right now is underpriced. Any of your thoughts would be appreciated.WP

[@AswathDamodaranonValuation]

As companies scale up, like Tesla is, it is the end revenue that you should focus on, not the growth rate. You can give them Ford-like revenues, but remember that Ford is a true mass market company while Tesla is still at the high end of the range. Giving Tesla tech-company margins with Ford-level revenues requires a story that I find difficult to invest in, but its your money that you are investing. You need to do it based on your story.

[@vkmacro919]

Excellent work.

[@jonathanedward5062]

Once again, great analysis!

[@supermario7432]

Great video as always. Thanks.

[@sandeepvk]

i think Tesla already heard you :) - Tesla plans to issue $1.5 billion in 8-year bonds to help fund the production of its new Model 3 sedan. The bonds will carry a 5.75% coupon and, so far, reports indicate that bond investors are more than happy to fork over cash to purchase them.

[@JrJ2016]

Prof, fact is Hybrid is succesfull than electric was started by Toyota.

[@simonnielsen6023]

Can you please value tesla again, with the consideration of margins within 20-30 % Autonomy, Energy ? using your numbers and updating it 2 years i am getting + 500 a share

[@nicolasb.8645]

What about Tesla's debt when interest rates would go up?...

[@shawn576]

It all depends on stock price. When the stock price is this high, they can always issue equity to pay debt. If the stock bubble pops, there is no way to print their way out of debt. It's hard to predict because I don't understand Tesla investors or Tesla drivers.

[@mariof.a.stevenson304]

@8:52 What kind of report is that? Nvm I'll see the spreadsheet.

[@wildreams]

I think this is a sign that Elon is very confident that Tesla would achieve positive operating cash flows soon.

[@ArunKumar-yb2jn]

Sir, the # of cars sold column is not number formatted.

[@contra0022]

Theory of reflexibity strike back

[@JrJ2016]

I value his every sentence in gold. Musk is just afraid of shareholders which he shd not if he wishes to grow

[@torinosassineto1053]

Maybe the reason Elon musk has been resorting to bonds to finance tesla istead of shares is because he wants the company to be firmily in his hands and less vulnerable to corporate raiders and big institutional investors that could take a major stake in the company and reestructure it completely. We should never forget that Elon's revolution is constantly under threat of very powerful interests that want him to fail , like the whole oil industry.

[@rishabhsurana332]

Torino Sassi Neto Class B equity shares with no voting rights can be issued in such a case where the owner doesn't want to dilute his shareholding

[@ab-finance6647]

He's resorting to bonds because the bond markets are FLUSH with cash. Junk bond yields are trading so cheap, you'd be stupid not to take advantage of access to such cheap money.

[@arkaboy87]

Provided the extent to which its share price is overvalued (even Musk admits it), equity could actually be Tesla's cheapest funding option.

[@ab-finance6647]

I don't buy that reasoning when junk bond yields are so low. Not to mention, he's going to have to raise funds to cover costs quite a bit over the next 18 months, probably wise to get established in debt markets. Not to mention there's probably less appetite for equity considering how many times he's tapped that market in the last 24 months. Not to mention that if/when the share price crashes there are a shiteload of negative effects and consequences to deal with and there are no real PR issues with bonds.

[@defcon12]

As a Tesla stock holder I really appreciate this professional feedback, thank you.