I know investors hate plowing through complex spreadsheets, but sometimes it is worth the money. This is especially true with regard to Aswath Damodaran’s valuation of Tesla. Aswath was a student of mine at UCLA and we have been colleagues for many years. His work is always careful and insightful. Perhaps even more importantly it is transparent. When Aswath posted a $68 valuation of Tesla on his website last week, he also posted a detailed spreadsheet that showed all the calculations and assumptions.
I spent part of this weekend going through Aswath’s spreadsheet. What struck me is how bullish his assumptions were. Had I not known the outcome, that he would conclude the stock was overvalued, I might have accused him of hyping the stock by making such optimistic assumptions – sustained rapid growth for 10 years in a highly competitive business while maintaining margins! Not easy things to do. Furthermore, despite the risks inherent in a Tesla investment he discounts future cash flows at less than 10%. Again an assumption that greatly favors a high valuation.
Despite these optimistic assumptions, Aswath’s valuation still comes to about $68 compared to a market price of over $160. I urge anyone thinking of trading Tesla stock to plunge into the details of Aswath’s work. You will find, for example, that dilution associated with outstanding options plays an important role. If that undertaking seems to daunting, it is probably not a good idea to be investing in Tesla’s stock.