In this article, I will be valuing the automotive business of Tesla (NASDAQ:TSLA) through the lens of how a biotech investor looks at a promising company. Tesla has many similarities to a biotech stock: hype around a product, dilution, large capital needs to bring product to market, manufacturing issues. The formula I will be using to value the company is:
Share Value = (Value of Potential Sales + Cash – Debt) / Shares Outstanding
Step 1: Value of Potential Sales
Value of potential sales has its own sub-formula, which I will have to calculate first before moving on. When looking at a biotech company, the formula that I use incorporates a measure of risk adjustment to factor in the chances of approval from regulatory agencies and market share to factor in potential competition. The formula is as follows:
Value of Potential Sales = (Market Potential * Market Share * Likelihood of Approval)
*Since likelihood of approval does not apply to Tesla, I will be substituting in likelihood of no bankruptcy. Therefore, my formula for value of potential sales will look like this:
Value of Potential Sales = (Market Potential * Market Share * Likelihood of No Bankruptcy)
Market Potential
I looked out to 2030 for estimates of the potential market for electric vehicles. Someone may ask, “Why 2030?” The reason behind choosing that point in time was that was the furthest point the data went to in a Bloomberg article estimating the number of electric vehicles that will be sold in the future. When valuing a biotech company, investors look at the sales potential of a drug or pipeline of drugs to estimate sales and/or peak sales estimates. I’m not saying that 2030 will be peak sales for Tesla, but that point in time is just the farthest point out for the data I looked at.
The following chart from the same Bloomberg article shows an estimate for over 20 million electric vehicles in 2030. While the article does not give an exact number, it appears the rough total is around 21 million. The next part of determining the market potential is to find the price that those estimated 21 million cars would be sold at. An article from the IEA put the average price of electric cars in the United States at around $50,000, and an article from Business Insider referencing a Bloomberg report in 2016 projected that in 2040 the average price of electric vehicle in today’s dollars would be $22,000. The price drop from $50,000 to $22,000, represents a decline of 3.36%/year, so I used that projected rate of decline in price to find the projected average price for 2030, which was $30,973.06. However, like Apple (NASDAQ:AAPL), Tesla has a cult following, and customers will likely pay a premium price to own a Tesla. Therefore, in the table below I adjusted the price 5% higher to reflect the likelihood that Tesla customers will pay a premium price. I then multiplied that adjusted average price of $32,521.71 by the roughly 21 million electric vehicles that are estimated to be sold in 2030, which puts the total market potential at just over $682 billion for 2030.
Source: Bloomberg
*See 2030 in bold below.
Avg. Price | Avg. Adjusted Price | |
2016 | $50,000.00 | $50,000.00 |
2017 | $48,318.55 | $50,734.47 |
2018 | $46,693.64 | $49,028.32 |
2019 | $45,123.38 | $47,379.55 |
2020 | $43,605.92 | $45,786.22 |
2021 | $42,139.49 | $44,246.47 |
2022 | $40,722.38 | $42,758.50 |
2023 | $39,352.93 | $41,320.57 |
2024 | $38,029.52 | $39,931.00 |
2025 | $36,750.63 | $38,588.16 |
2026 | $35,514.74 | $37,290.48 |
2027 | $34,320.41 | $36,036.43 |
2028 | $33,166.25 | $34,824.56 |
2029 | $32,050.90 | $33,653.44 |
2030 | $30,973.06 | $32,521.71 |
2031 | $29,931.46 | $31,428.03 |
2032 | $28,924.89 | $30,371.14 |
2033 | $27,952.18 | $29,349.79 |
2034 | $27,012.17 | $28,362.78 |
2035 | $26,103.78 | $27,408.97 |
2036 | $25,225.93 | $26,487.23 |
2037 | $24,377.61 | $25,596.49 |
2038 | $23,557.81 | $24,735.70 |
2039 | $22,765.59 | $23,903.86 |
2040 | $22,000.00 | $23,100.00 |
Market Share
To determine the market share potential that Tesla could have in the future, I looked at the current breakdown of automobile sales. Tesla bulls will say that the company has the first-mover advantage and will be the largest player in electric vehicles. Therefore, I looked to see who has the largest market share in the current market to determine a best-case scenario of market share for Tesla. The leader in terms of market share for cars is Toyota (NYSE:TM) with 6%. For my calculations, I used this 6% level, which is my best-case scenario for Tesla given the number of potential competitors coming into the market that are known at this point.
Source: Bloomberg
Likelihood of No Bankruptcy
To estimate the likelihood of no bankruptcy, I looked at Tesla bond prices and found that the bonds that are due the farthest into the future (2025) are currently trading at $94.38. So for my formula, I used 94.38% as the chance that no bankruptcy occurs. The reason why I believe in looking at bonds in relation to par value is I believe they can be a measure of bankruptcy risk. For example, I think most people would agree that Sears (NASDAQ:SHLD) has a lot of bankruptcy risk, and one way I measure this risk is by looking at bond prices. Currently, SHLD 2032 bonds trade at $42.95, which to me clearly shows that there is a big risk of bankruptcy for the company.
Value of Potential Sales for Tesla Calculations
In the table below are my calculations, which show that I estimated that the market value of potential sales for Tesla in 2030 will be $38.67 billion.
Value of Potential Sales = (Market Potential * Market Share * Likelihood of No Bankruptcy)
Market Potential | $682,955,897,184 |
Market Share | 6.00% |
Chance of Approval | 94.38% |
Value of Potential Sales | $38,674,426,546 |
Step 2: Cash, Debt and Shares Outstanding
This step was simple – all I needed to do was pull data from the company’s balance sheet. Tesla has $3.53 billion in cash, $10.009 billion in short-term + long-term debt, and it has 167.3 million shares outstanding.
Putting it all together
After collecting the balance sheet data, I was able to combine it with all my projections for Share Value = (Value of Potential Sales + Cash – Debt) / Shares Outstanding. The table below shows Tesla is overvalued at its current price, and my projections assume the best-case scenario that the company will be the #1 player in the electric vehicle market and that its debt and shares outstanding remain at current levels. This is not very likely given the potential capital needs to finish getting the Model 3 to production targets as well as any costs for up to five total Gigafactories that Tesla is considering building, or the Semi that the company will be highlighting this week.
Market Potential | $682,955,897,184 |
Market Share | 6.00% |
Chance of Approval | 94.38% |
Value of Potential Sales | $38,674,426,546 |
Cash | $3,530,030,000 |
Debt | $10,009,000,000 |
Shares Outstanding | 167,300,000 |
Projected Value | $192.44 |
Current Price | $302.99 |
% Downside | -36.49% |
Closing Thoughts
In closing, I believe using a biotech valuation method for Tesla is intriguing because of the numerous similarities that it has with biotech companies, especially those biotech companies with a lot of hype around them. Since there is a lot of hype around the Model 3 and Tesla in general, there were people on CNBC this past week who noted that they have a $500 million position in Tesla, and in the interview speculated about the chance of returning 20x their investment in 10-15 years. The problem with that is Tesla currently has a market cap of nearly $51 billion, so a 20x increase puts the value of the company at over $1 trillion. With this type of hype, and additional hype from side products like the Semi, in my opinion, it will not be long until Tesla taps investors again through either a share offering or a debt offering.
Disclaimer
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.