Tesla Recommendation

Tesla is a company that has two reportable segments, the automotive segment and the energy generation and storage segment. At Tesla they design, develop, manufacture, sell, and lease high-performance fully electric vehicles, as well as their energy generation and storage systems. A large emphasis is put on performance, attractive styling, and the safety of its users and workforce when it comes to the design and manufacturing of its products. Tesla is continuing to develop fully self-drivable technology for even more safety.

The automotive market is a highly competitive one. Tesla's main competition is dictated based on each model of vehicle. The Model 3 and Model Y compete with small to medium-sized sedans and compact SUVs and the Model S and Model X compete primarily with premium sedans and premium SUVs. It is Tesla's belief that as they continue to introduce new models and technologies, even more automotive companies will look to introduce a version of an electric vehicle, thus increasing competition further more.

As Tesla moves forward they look to continue progress on their Autopilot, FSD and neural network capabilities, Supercharger network and infotainment offerings. Tesla's mission is to, "accelerate the world’s transition to sustainable energy, engineering expertise, vertically integrated business model and focus on user experience differentiating us from other companies."

Now, I'll take a dive into the financials and move on to the cost of capital configuration.

To determine cost of capital, the weighted average cost of capital (WACC) equation will be used. The equation is as follows:

WACC = Rd x (1-Tax) x (D/D+E) + Re x (E/D+E)

Rd = cost of debt

t = marginal tax rate

D = market value of debt

E = market value of equity

Re = cost of equity

Before calculating WACC, cost of equity (Re) must be calculated. For this calculation it is assumed that β =1.96, market risk premium =16%, and the risk-free rate =1%.

Re = 1% + 1.96 x 16%

Re = 32.36%

For the tax rate 25% is assumed to be correct because it was Tesla's effective tax rate in 2020 and they have remained profitable in 2021.

For D, 28,418 is being used because that is what Tesla reported in its financial statements as total liabilities for 2021. Therefore, (D/D+E) = 56.11%

For E, 22,225 is being used because that is what Tesla reported in its financial statements as total shareholder's equity for 2021. Therefore, (E/D+E) = 43.89%

For Rd 1.25% is being assumed because Tesla's 2021 Notes contractual interest rates are 1.25%, so it was assumed to be an appropriate measurement of their cost of debt. This number was found under the debt and finance leases as of December 31, 2020 section.

Cost of Capital calculation with assumptions filled in:

WACC = .0125 x (1-0.25) x .5611 + .3236 x .4389

WACC = 14.73%

Now that we calculated WACC we can use that to help calculate the projected per share price. However, first we need to calculate unlevered free cash flow to help get to our total present value. That process is outlined below.

2018 2019 2020 2021 2022 2023 2024 2025

Gross Profit 4,042 4,069 6,630 7,411 9,264 11,580 14,475 18,093

EBIT (253) 80 1,994 1,644 2,412 3,373 4,574 6,076

FCF 2,036 1,330 1,986 2,806 3,833 5,115

TV $ 1,822,721

PV 1,159 1,509 1,859 2,212 919,603

To calculate gross profit I used revenue minus cost of revenue. In order to calculate the 2021-2025 projections I took the average percent change from 2018 to 2020 and multiplied each preceding year by 1 + the percent change beginning in 2021. The percent change for revenue was 25%. So for example I took 2020 revenue x 1.25. The percent change for cost of revenue was 81.2%. Then to calculate EBIT I took gross profit minus R&D and SG&A. To calculate R&D for 2021-2025 the average of 2018-2020 was taken and assumed for 2021-2025. This assumption was used because R&D is relatively a fixed amount from year to year. To calculate SG&A it is 11% of revenue for each year. This assumption is okay because it is also relatively fixed like R&D. To finally calculate FCF I took EBIT - Taxes + Depreciation & Amortization - Capital Expenditure - Increase in Net Working Capital. Taxes, D&A, Capital Expenditure, and Increase in Net Working Capital information was all gathered from Tesla's financial statements.

To go a step further this information is used to calculate Tesla's per share price. In order to do that the terminal value must be calculated as well as the total present value. Terminal value is 300 multiplied by 2025's FCF number. 300 is assumed because the P/EBIT calculated for 2020 is about 340 which is already a pretty high valuation. I decided to back this down to 300 to be a little more conservative. Finally, to calculate the total present value I took the respective years FCF and divided it by 1 + WACC of 14.73% that was calculated earlier. Then, for the years following, so in 2022 I used the same equation but raised it to the second power and then the third power for the next year and so on. For 2025, I took FCF + TV/(1+.1473)^5.

At last, I summed up the present value numbers to get a total PV of 926,341,845,433.41. I then gathered the total common stock shares from Tesla's 10-k which came out to be 959,853,504. Finally, to calculate the per share price I took total PV divided by total common stock shares to get a per share price of $965.09. The per share price as of today 8/31/2021 is $735.72. My projection predicts Tesla to be near $970 by 2025 increasing in price by over $200 per share. For that reason I would recommend for my clients to buy shares in Tesla.

To help with projections for Tesla's per share price I decided to perform a sensitivity analysis by changing some of the assumptions used to calculate their projected per share price. To do this I thought it best to change the growth percentage to a higher percentage and a lower percentage to help give a range to look at based on Tesla's true growth that we will find out along the way. For this exercise I will use a 20% revenue growth rate for the lower bound and a 50% revenue growth rate for the upper bound.

When changing the growth rate of revenue up to 50% the per share price was calculated out to be $2,733.90. Then when the rate was changed to 75% the per share price sky rocketed even further to $6,165.04. This sensitivity analysis shows that Tesla's per share price is very volatile. Tesla is a business that is rapidly growing and gaining popularity, as well as continually making strides to make improvements with its automotive and energy saving segments. This makes it a promising sign that Tesla's revenue will continue to grow at a faster rate than 25% making the sky the limit for Tesla's stock valuation.