Time to Sell TSLA Stock? A Simple Explanation of Tesla's Valuation

Hey everybody, Rob Maurer here, and today we're gonna go through just kind of a simple, basic example of Tesla's valuation. We're gonna kind of look out to 2030, just because Tesla stock has been, you know, taking kind of a beating here over the last month or so. Obviously, a lot of people have been asking about this, so just wanna take some time and go through a really simple example, and then we'll take some questions at the end. So just to first talk about the stock, so we had it today, Tesla's down 4%. The NASDAQ was up 1.5%, so kind of an unusual split there, Tesla underperforming by quite a bit. And then for the last, you know, since Tesla's all-time high of right around $900 per share, Tesla's down 34% as we sit here at the close on Friday, March 5th. But, you know, as we've been talking about over the last couple of weeks, this isn't isolated to Tesla, so before we get into that, you know, valuation stuff, this is the change from the 52-week high for just a bunch of random stocks that I put in here. Tesla's down 34% from their all-time high. That fits in with, you know, a lot of other new energy companies, electric vehicle companies. So you've got like XPeng, Arcimoto, Virgin Galactic, so obviously in the space sector there, but NIO, First Solar, Fisker, SolarEdge, all kind of down in these ranges or worse. And then even more stable tech companies, Apple and Amazon both down 16% from their 52-week high, Nvidia down 20%, even Netflix down 13%. So this is certainly not isolated to Tesla, but nevertheless, I thought it would be a good time to just take a look at Tesla's valuation. So, again, as I said, this is gonna be a conservative example. After I run through the conservative example, we'll take more of a look at like what Tesla, Tesla's own projections, what that would lead to. But I figured let's start out with something that's pretty conservative. So Tesla, as we know, is targeting to grow vehicle deliveries 50% per year on average, kind of over the next decade, eventually scaling up to about 20 million vehicles per year. So to be conservative here, let's just assume that they grow at half the rate that they're targeting to grow at. If we, if I uncover this here, you can see that that gives Tesla a rate of 6 million vehicles per year in 2030. So they're targeting 20 million. Here we have them getting to 6 million. This is, hopefully, you see that as pretty conservative. That would put Tesla amongst the largest automakers in the world, but certainly not the highest. Volkswagen, Toyota, those companies are doing more like 10 million per year now. This would put Tesla maybe at twice the size of BMW. So should be pretty reasonable. And again, hopefully leaning on the side of conservative. So let me uncover kind of the rest of this first section here and we'll see what that does for Tesla's size of business, the revenue, and things like that. So here in the revenue box, I don't think you guys can see the formula, but I just have the total number of deliveries in 2030 times 35,000. So this is kind of just the most basic look possible that we could have on revenue. That leads to just automotive, just selling the vehicles, revenue of $210 billion. So we're gonna talk more about some of the other elements here, but just talking just cars and a $35,000 average selling price, which I also believe to be conservative because the average selling price of the car in the U.S. right now is, I think, like $37,000. In 10 years, it's certainly gonna be higher than that. $40,000 would probably be a better assumption here, but again, just to err on the side of conservativism. Let's say $35,000 a car, $210 billion in revenue. If we give them an 8% operating margin on that, which we'll talk about some context here, that gives them about $17 billion in operating income, net income of about $13 billion if we assume that they're getting about 80% of their operating income to actually be net income after taxes and things like that. So on that operating income margin of 8% there, in 2020, their operating margin was 6.3%. So this only has them scaling up a couple of percentage points from where they're at today, even though they'd be 12x-ing their scale from where they're at today in terms of vehicle deliveries. I think that's extremely reasonable. Some might argue that, oh, if you include things like regulatory credits, that was about $1.6 billion this year. Stock-based compensation, that was $1.7 billion. So people will argue for those regulatory credits to be taken out, but you should also then think about the impact of stock-based compensation, which right now is impacting Tesla, certainly way, way more than it's going to be in 2030. If we look at some examples here, Amazon's stock-based compensation this year was 2%, Apple's was 2%, Tesla's stock-based compensation was 5%. So if Tesla's stock-based compensation, which is overly impacted right now as Elon Musk's compensation plan, a lot of that hit this year, so it's kind of outsized this year. If that comes back to a normal level like it would in 2030 of 2%, that would add essentially three points. You'd get to Tesla's operating margin then of 8%, even factoring out additional economies of scale by that point in time. So I think 8% is extremely reasonable. If we exclude the revenue that they generated most likely that they were able to recognize in 2020 from full self-driving, because we're gonna get to full self-driving and the impact there, this is just talking sales of vehicles. So if we exclude the additional operating income that they generated from full self-driving this year, that put their operating margin at right around 5%. So 5%, they had probably 3% extra in stock-based compensation. If those are factored out and we don't really account for any economies of scale, regulatory credits is gonna become much smaller at that point in time, pretty much inconsequential. I think 8% is, again, very conservative, realistic for Tesla for 2030 for just selling cars without including the revenue from full self-driving. You may argue, well, that's like way higher than something like Ford or Toyota or GM, but they're not comparable companies. Tesla has their own stores. They have their own service centers. They have their own charging. They have their own software premium connectivity right now. That's 10 bucks a month or something like that. They're introducing gaming already. So Tesla has a lot more avenues for high margin revenue and even just more in their business for each car they sell. So they're gonna capture more operating income than a company like Toyota would. So it's not necessarily fair to compare them and it's not fair to look at other automakers' operating margins and say that Tesla is gonna be at 2% or 3% because these other companies are. Even if you just include dealers, they would be much higher than that. So that's the 8%, again, net income. So to get that, I'm just taking 80% of the operating income. If we look at Apple and Amazon this year, which Tesla at this point would be around that scale, Apple was 86% of their operating income fell to net income. For Amazon, it was 80%. So I've taken the more conservative of those and just said, okay, 80% of this operating income of about $17 billion would be net income. If we assign a price to earnings multiple of about 50, 50X on that, which as you can see here in Q4 when I started working on this, I was gonna do this episode earlier, but when we look at Amazon price to earnings then, it was 97, Apple was 42. Now with the recent declines, Amazon's more like 72, Apple at 33. So Tesla, very conservatively with this kind of growth, again, this would be 25% growth just on cars each year, which is still phenomenal, but only half of Tesla's target. I think a 50 PE is kind of the low end of where they would be. And that would put Tesla's market cap at right around $675 billion. I think today we're maybe like 550-ish, 550 to 600 billion. So just this alone, just cars, half of Tesla's growth rate, pretty conservative assumptions here, all around. That would get you to a valuation right around 700 billion. That's not the kind of return you want. That's 10 to 20% increase from today's levels. That's obviously not the kind of concern or increase you want over a decade. That's maybe gonna keep up with inflation at best, probably not even. So that wouldn't be a very good investment. But as I said before, this doesn't include full self-driving. So let's look at, again, we're gonna be very conservative here, but let's look at how full self-driving can impact this scenario. So what people often miss when they think about full self-driving, when they think about Tesla's business, is that since 2017, all these deliveries here, Tesla has been delivering vehicles with extremely valuable hardware, and then unlocking the value of that hardware with software over time. How they've been doing that is with the full self-driving and autopilot software. So if we look at this total amount of deliveries from 2017 to 2030, there's gonna be 28 million vehicles, Tesla vehicles on the road at that point in time under these conservative assumptions. If we say, okay, 5% of that fleet is gonna be scrapped or get in an accident or whatever, just too old and retired, there's gonna be about 26 and a half million Tesla vehicles on the road in 2030 that have full self-driving hardware. Now, maybe Tesla has to upgrade the computer boards on them or whatever the case may be, but by and large, they should have capable vehicles of, they should have vehicles capable of maybe not necessarily completely autonomous driving, and that's what I wanna run through here as this is very conservative. This assumes that Tesla doesn't actually ever get to like a level five, maybe not even level four type of scenario. Again, we're trying to be conservative here. So they've got 26 and a half million vehicles out there with this hardware. Let's say it advances to the point of like the full self-driving beta where it can't do ride sharing, it can't go pick up anybody autonomously, but that software is still extremely valuable and people are gonna pay for that. So let's say Tesla introduces this full self-driving subscription. Let's just for simple, for the sake of ease, let's just assume that they stop selling the option as a package for $10,000, they just convert over to everything being subscription. If that's $200 per month, which essentially is the price of a $10,000 option over five years, and let's say the take rate is 25%. So these are pretty much all of today's numbers, just assuming that this continues into the future, assuming Tesla doesn't really get any better. If they offer this at $200 a month, 25% of customers take this, again, trying to be very conservative here, that would lead to revenue per car per month of $50. If we times that $50 times the 26.5 million cars on the road that's $1.3 billion coming in each month to Tesla. And this is extremely high margin revenue. So let's look at how this changes the equation. So $1.3 billion a month, $16 billion in revenue, this should be extremely high margin revenue. Their additional costs here, their cost of operations should be pretty much covered in this part of their business, where they've already scaled, they're already shipping cars, they're already delivering them, they're already servicing them. The software revenue is extremely high margin. So I have it at 97% here. That leads to operating income from FSD of $15.5 billion per year. Net income, again, just assuming that 80% rate of 12.4 billion. So if we apply a 50 times earnings on that net income, then we get an additional $620 billion in valuation. So putting those together, you get to about a valuation of about $1.3 trillion. And again, this assumes, this doesn't assume that Tesla has this fleet of 30 million autonomous robo-taxis on the road. This just assumes that for every one out of four vehicles that Tesla sells, that those people opt to have this $200 a month full self-driving package, which is pretty much what's happening today. Maybe you could argue that as Tesla sells more vehicles, the price bands are gonna come down and less people would opt in for that $200 a month service. That's fair, but Tesla under this scenario could also then drop the price to let's say $100 a month. So, you know, it's $1,000 a year or something like that to have this extremely capable autonomous assist package that maybe falls a little bit short of full self-driving. I don't think that's gonna be the case, but just to be conservative again, I don't, I think they could lower that $200 a month, get a 50% take rate, and you'd end up with the same numbers as we're looking at here. So this is, I think, probably the lowest end case for Tesla. This assumes they, you know, they're, oh, sorry. I probably covered up the valuation there. My bad on that. So this assumes that Tesla doesn't get to a robo-taxi scenario. This assumes that they only hit half their targeted growth rate. And this assumes they don't really increase their operating leverage from where they're at today, even though they'd be growing their business by, you know, 12X from a delivery perspective. All extremely conservative assumptions. And then if I unhide a little bit more notes here, this doesn't account for energy storage. It doesn't account for solar. It doesn't account for Tesla insurance. It doesn't account for charging licensing. It doesn't account for battery licensing. It doesn't account for AI. If Tesla licenses anything with AI, with Dojo, and literally anything else. So this is kind of like the barest bones valuation that I could see being realistic. We'll come back to this in a second and I will take some questions, but I'm just gonna scroll over here. This is something more of like what Tesla is targeting. So this has vehicles, deliveries going to 20 million in 2030. That means Tesla delivers a total of 66 million vehicles between 27 and 2030 that have full self-driving hardware. And again, I'm gonna be conservative here. Assume they don't get to a full robo-taxi scenario, which is gonna generate a lot more than $50 per month per car. But if this is, you know, if there is no further progress in autonomy, I think this is a reasonable valuation for that side of the business, assuming no further progress beyond kind of the FSD beta today. That means under this scenario, Tesla's generating about $3.1 billion a month in recurring high margin revenue. That's $37.5 billion a year. Operating income, 37 billion. Net income after 20%, 29 billion. You apply a 50 times multiple on that and you've got a $1.5 trillion valuation just from that recurring FSD revenue. And that's on top of the, since they're selling 20 million cars a year here, just the core auto business would be worth about 2.2 trillion. So putting those together, you're at 3.7 trillion. And again, this just basically is the same assumptions being very conservative on both operating margin and on the amount of revenue that Tesla's generating per month from FSD, only $50 per month per car. And that gets you to a $3.7 trillion valuation. If Tesla cracks full autonomy per car, they should be able to generate quite a bit more than $50 per month on those fully autonomous vehicles. Like that's an insanely low amount of money. And again, if we go back over here, we're still not accounting for any of these things. So this is why when I look at Tesla's valuation and I sit here and we fluctuate between, let's say $30 billion last year, kind of at the low. And at the high, maybe we're at 800 billion, something in that ballpark, maybe 900 billion. It doesn't really matter to me because I think Tesla's got a super clear path to valuations in the multi-trillion dollar level. Where that ends up shaking out, who knows, that's a matter of how much progress Tesla makes. But I think there's a very clear path here to those kinds of valuations. So it doesn't really phase me too much whether Tesla today is $500 billion, $200 billion, a trillion dollars. I still believe that this is gonna be the future. And what's more important to me is just watching how Tesla's progressing towards that future and how the marketplace is developing as well and Tesla's place in that market. That's why we have Tesla Daily because that's what we're trying to assess those things every day along this path. So shameless plug to subscribe for that. Let me then pop over here to chat and just see if we have any questions. I really hope that the audio worked out okay for this. So bear with me here, just trying to catch up on the chat and see. So we've got a question here from Roland. Roland says, how many cars already on the road do you think will opt into the FSD subscription? How do you think that could affect margin this year? I think we need to wait and figure out how the pricing looks. Tesla could structure this in a number of different ways. They could say, you know, we're gonna have a $5,000 activation fee and then it's gonna be $100 a month. They could say just right off the bat, it's gonna be $300 a month. So I'd wanna see kind of the characteristics of the plan before deciding on that. The other thing is until Tesla delivers more of these features, they can't actually recognize all the revenue. So we talked about that a little bit at the start. They can recognize a little bit, I think a little bit more than half of it right now. So once they start delivering the full self-driving beta to other customers, they should be able to recognize more of that. Maybe it creeps up to like 80% then, you know, that would be up to Tesla and their accounting team to determine. But certainly as more people opt into that, it should be margin accretive this year. As for what percent, tough to say. But the thing about Tesla is because they're growing delivery so fast, you know, the fleet is basically growing, it's basically doubling every 12 months or every 18 months or so. So the older vehicles and how many of them opt in become less and less important over time as the fleet grows so rapidly. All right. Pete says, please sum those two rows so we can see the 3.7 trillion. All right, give me one second, Pete. There you go. And again, these aren't my price targets necessarily. So, you know, 3.7 trillion from today's, let's say $600 billion valuation, that's gonna be a 6X. The share price would be a little bit less, so maybe a 5X on the share price because you're gonna have dilution, you're gonna have further stock-based compensation, things like that. So maybe the share price then, you know, if we get a 5X on $600, you're looking at $3,000 share price then in 2030. But again, not my price target, not my forecast. This is just walking through an example that I think is conservative. For Tesla, even if they don't get to a fully autonomous robo-taxi scenario, if they do achieve that, throw these numbers out the window because they're gonna be generating a lot more than $50 per month on average on each car they sell. So Dylan says, can you dive into your PE multiple and play around with a range of PE multiples based on cost of capital and interest rates? Not in this example, because it's meant to be just super, super simple, pretty conservative, that type of stuff maybe we can go into more detail on in the future. But here I think, again, the 50 is pretty conservative. If Tesla were actually growing at this rate, especially in that second example, they should certainly carry a higher multiple than 50. But that PE is also gonna depend on market conditions too. Like we've just seen Apple and Amazon's PE cut by 20% over the course of three months. So it just kind of depends what's happening with the macro environment as well. If we're in a, you know, really suppressed valuation type of macro environment, 50 PE could be a little bit high if the S&P is somewhere around like 15 or 20. All right, super chat here. Elon has said Tesla AI hardware and software is deeply underestimated. What would you ask Elon in regards to how FSD should be valued according to him? So Elon has walked through this a couple of times. He's given a few different answers. I think at one point, maybe autonomy day, he said it should be worth, you know, like $100,000 because if you have a $35,000 car, you should be able to increase the utility like three or four X on that car. I don't think that's like a perfect way of looking at it. It's just a quick example from him. I don't think that's how he would, you know, if he were to try to financially model it, I don't think that's where he'd end up. But, and then in the most recent earnings call, he said, you know, if people just assume that even if you double the utility and you have a, let's say a $50,000 average selling price on your car, can't remember where he started as his base, but if you have a $50,000 average selling price and then you double the utility, should be worth another $50,000. And that additional $50,000 essentially creates, you know, 100% operating income close to that. So he's not really looking at it from a monthly perspective. He's looking at the total value, which we could do that too. I think the reason I chose to look at it monthly like this is because I think Tesla is going to shift over to just being a monthly subscription type of offering. Maybe in the interim they offer both, but certainly on this 10 year time horizon, I think they'll switch over to just being completely subscription based. Part of that is because Tesla doesn't want to, Elon feels like right now selling the option for $10,000 is giving it away for far, far below its value. Again, a couple of examples there, but he seems to think it's worth somewhere between 50 and $100,000 per car and they're selling it for $10,000. That's not a great situation for them to be in. If they have a monthly subscription price, they can raise that price over time. People aren't locked into the, you know, they don't get that additional 40 to $90,000 of value just in perpetuity, which is a bad deal for Tesla. All right, I'll probably take just one or two more questions here. So Lorenzo asks, how conservative is your 8% operating margin? That is a big variable in this equation. I think there are bigger variables, but that's a significant one too. So as I said, this year it was 6.3%. That includes the $1.6 billion of regulatory credits though. If you take out the regulatory credits, it's actually closer to maybe 1% or 2%. But again, that includes that stock-based compensation, which is just way too high right now. So if you take out regulatory credits, you normalize stock-based compensation. Tesla probably comes in somewhere around 4% operating margin today. I think if they 12X the size of their business in that first example, that should, you know, easily allow them to 2X their operating leverage. So I think it's pretty conservative. I'm hesitant to go too far beyond that just on the car selling line, because there's not really much of a reason to. Tesla's gonna try to get hardware out there, you know, for a pretty low cost. And then they'll capture the margin through software, kind of like how I've laid out here. So it's not aggressive, not conservative. I think it's kind of like right where Tesla would probably target to end up. So good question here, Rob. How could you justify a 50 PE ratio for a company whose core is still manufacturing with low margins? Could FSD warrant such a high multiple? So I do have a 50 times multiple just on both here. The market isn't going to separate, you know, Tesla's car business from the FSD business. Models might do that a little bit, but the total market's just gonna look at, you know, Tesla's growth, their operating leverage as a whole, factoring in that high margin revenue. And, you know, when you combine these things, let's, maybe I can just even do that quick here. You've got $93 billion in operating income. You've got revenue of 737 billion. So you've got a total operating margin of, you know, 13%, as long as I did that math right. I think the market's gonna be more looking at that versus saying, oh, like the core business where they're generating, you know, 90% of their revenue is these low margin vehicles. It doesn't really matter because, you know, the software is basically almost doubling. And again, this is very conservative. It's almost doubling their operating income under this pretty conservative scenario. All right, so I'll take one more here and we'll wrap it up for the weekend. Sorry if I missed any of the super chats, guys. So super chat here. The only thing that worries me is that Michael J. Burry seems sure Tesla will go back to $100. Are we missing something? No, that's everyone's decision to make for themselves. I'm confident that I'm not. Very confident that I've spent more time analyzing Tesla than Michael Burry has. So I think it's important to not overemphasize one individual's market prowess based on, you know, one circumstance. Calling a housing bubble is very different than analyzing tech disruption. It's very, very different categories. So not to say that Burry doesn't have any investing prowess beyond that. You know, I'm not super familiar with his investments beyond, you know, what everyone kind of knows. But, you know, we've heard these billionaire shorts be betting against Tesla for years and years and years. And they've been wrong when they present their arguments. Their arguments are wrong. You don't have to dig very far into what they're saying to just point out flaws. So for those reasons, I'm pretty confident that that, you know, I'm confident in my own analysis. Everyone should try to do their own analysis too and become comfortable and confident in their own thoughts. So with that, I think we'll wrap it up, guys. Thanks for listening. Hope everyone has an awesome weekend. Don't forget to subscribe. And, you know, shameless plug here. I could easily, you know, sell models like this or, you know, just have individual calls with people and walk through, you know, my valuations and stuff. I hate doing stuff like that. I don't ever want to do that. The only reason that I can not do that is because of the support that people give on Patreon. So just a huge shout out to those of you that do that. You know, it makes this possible for everyone. And if you are interested in joining that group, you can find those details at patreon.com slash Tesla Daily Podcast. But with that, we'll wrap it up. As always, thanks for listening. Have an awesome weekend. Make sure you're subscribed and sign up for notifications. You can find me on Twitter at Tesla Podcast. Otherwise, I'll see you on Monday for the March 8th episode of Tesla Daily. Thank you.