DCF Conclusions on Tesla (TSLA)
TSLA DCF Conclusions Shared
Hi Everyone -
In this research note, I’ll be covering DCF Conclusions on TSLA. Long-time friends may remember that I did a TSLA DCF back in summer of 2023 where my core conclusion when it traded 260/share was the following - that a final push could get the stock to 300 but at that point “Resistance will be formidable”.
TSLA topped around 300 in 2023, and will take quite some time to reclaim it.
This is an example of infusing DCF Research into a Stock’s Support/Resistance levels to see which areas the Buy Side is looking at. Buy Side institutional traders know the valuation-band of the stock they are trading and know whether it trades at a premium or discount to their internal DCF models from the efforts of their equity research teams.
This note will be an update on DCF Conclusions for TSLA.
Trading Journal: Before we get into TSLA, I posted another trade recap on Instagram for today’s action, where we had saw a nice gap up after PCE Inflation and saw upside continuation into 5105 on ES at the open, discussed in our Pre-Market.
I now participate in 3 Timeframes: Intraday, Intermediate-Term, and Long-Term. On an intraday basis, I saw an opportunity that Low of Day may have been made in the pre-market and that 0DTE Put Strikes underneath those levels may evaporate quickly in the session.
Traders will likely keep the full premium by 4pm today. I was able to capture about 50% of it. Because 0DTE Puts are highly volatile, I’ve found that if I’m selling the option, I typically can consistently only realize half of it. Trying to capture the full 100% comes with far greater risk.
For instance, all Put Strikes mentioned below had already lost -50% by 1030am (good for us Sellers who closed). However, there was a mid-day flush that brought all these 0DTE Puts back to life and they went from -50% to +150% (very adverse for Option Sellers). For this reason, it is important to take profits vigilantly with these instruments, whether you’re Long/Short.
Today’s TSLA DCF will be very educational for our Community.
I do think this will help my readers as it opens up a “new way” to think about the fusion of DCF Analysis and Technical Structure on a stock, which allows us to be more objective when it reaches those key levels.
If you’re a public reader interested in learning how DCF modeling can help with trading/investing strategy, I really do think you will enjoy this analysis as I walk through how the DCF conclusions find their way into important levels on the Stock’s Charts.
More education/good discussion below.
TSLA DCF Discussion
Out of the Mag7, Tesla has struggled compared to its peers. Below, we will discuss why that is (yes, it’s justified) and what key pieces of information we should look for to find a fundamental positive reversal for the stock.
Let’s start with looking at the critical fundamental pieces for the company.
Exhibit 1: DCF Core Figures from 2023
Exhibit 2: DCF Core Figures in Late Winter 2024
Here are the conclusions that I’m drawing
Wall Street Consensus Revenue estimates have been cutting TSLA revenue forecasts when compared to my 2023 DCF. It appears the cuts are rather significant - in the 15-18% region.
Revenue Growth RATES estimates have taken a step down from 23-29% in the 2023 DCF Model towards a 15-21% growth profile based on current estimates.
EBITDA estimates are facing headwinds with terminal 2027 year estimates made today facing a 40% cut from last year’s estimates.
EBITDA margin forecasts from 2024-2026 have been downgraded from the 19-21% profile into the 17-18% profile.
Special note on Shares Outstanding: TSLA saw share dilution of about .3% year over year.
With the bullet points above, this is convincing evidence that Tesla’s selloff is fundamentally-driven. When the fundamentals improve, so will the stock.
Seen in chart above, Tesla is facing margin pressures as Elon Musk continues to change pricing for the firm’s flagship vehicles in a dynamic manner based on supply & demand dynamics. Combined with softness in China and greater competitive forces from BYD, Li Auto, and XPeng, Tesla’s margins likely face continued pressure in the foreseeable future.
Tesla has a very lumpy history for its margin profile as it swings from negative margins to positive (implied by chart above), so a better way to assess its profitability is by looking at quarterly data over the past 4-5 years rather than looking at averages, shown below.
We can see that over the past several quarters, the highest EBITDA margin registered is about 21.5%.
Some data aggregation from the table above.:
For this reason, 21.5% EBITDA margin is my max Bull Case input when I update the model. It does not yet make sense to input a figure greater than 21.5% because there has been no evidence the firm has achieved so.
On the other hand, a bear case EBITDA margin should be generally be no lower than 7.25% unless there is a dramatic change in their business model.
The current margin level is 15.3%.
The Street’s forecast is 18%.
Historical Valuation Data for TSLA EV/EBITDA
Here is the historical range of TSLA EV/EBITDA multiple over a 10 year period.
Today it is 41.9X
Average is around 71X
Median is about 51X
Out of conservatism, I will only use today’s EV/EBITDA valuation multiple and not give any valuation expansion to the company.
DCF Model Outcomes/Scenario Analysis:
The most important inputs in my opinion are 1.) Top Line Growth (Sales) 2.) EBITDA Margins (profitability) and 3.) Valuation Multiple EV/EBITDA (what Investors Pay).
In all scenarios below, I will assume Wall Street Revenue estimates are accurate. The inputs that I change are EBITDA Margins and the EV/EBITDA Multiple. Changing revenue estimates do not move the needle by that much.
For TSLA specifically, it appears the firm is under rather severe margin pressure. Generally speaking, if we hear news that TSLA is lifting Average Selling Prices (ASPs) on its vehicles, it’s likely that margin forecasts will be immediately repriced higher and this will lift the stock.
So, I view Tesla raising car prices again as a Buy Signal. Even if the stock falls after such an announcement, the DCF Model’s importance on EBITDA margins will eventually prevail (and rising ASPs will help margins), in my opinion.
Out of conservatism, I will not give multiple expansion to TSLA and will keep it at 42X EV/EBITDA (today’s level) for all scenarios.
Scenario 1 Assumptions:
Wall Street Revenue Estimates for 2027-2028 are accurate
Terminal Year EBITDA margins are 15.3% (Currently the Terminal Year Estimate)
Apply a 41.9X EV/EBITDA multiple (same as today)
260-265/share
Long-term: This price does make sense for Tesla. It will just take a while (within 1-2 years). Notice that this level was heavily traded over the past 6 months.
Scenario 2 Assumptions:
Wall Street Revenue Estimates are accurate
Terminal year EBITDA Margins are 18% (Wall Street Consensus in 2026+)
Apply same 41.9X EV/EBITDA multiple (Same as today)
300/share
Note: This will depend on Tesla raising Average Selling Prices on their Cars Again
Scenario 3 Assumptions
Wall Street Revenue Estimates are accurate
Terminal Year EBITDA Margins are 21.5% (Corporate High Margins)
Apply 41.9X EV/EBITDA multiple (today’s level)
360-366/share
Note: This level is only likely to be reached during peak states of euphoria. It may be a long-time until we see 360 again in my opinion.
Scenario 4 Assumptions
Wall Street Revenue Estimates are accurate
Terminal Year EBITDA Margins are 7% (Corporate Low Margins)
Apply 41.9X EV/EBITDA multiple (today’s level)
130-140/share
Note: If margins come down to 7%, it is likely the stock faces valuation multiple as well, so reaching 130-140/share will be a dangerous loop of fear if it gets there.
Commentary:
As we can see above Tesla’s equity value is highly dependent on its ability to preserve its margins, meaning the best thing investors should listen for is Tesla’s average selling prices for their vehicles. Toggling the EBITDA margin variable between 7% and 21% has the ability to shift the stock’s value from 130-140/share to 350-360/share.
Margins are that important in the DCF model.
Revenue growth is important, but secondary when compared to margin forecasts and the valuation multiple that the Street gives the stock.
To experienced Tesla investors who remember the path of the stock, it should come as no surprise that 300/360 and 140 are key levels when using technical analysis. They simultaneously represent the Bull and Bear case of the DCF.
I have outlined the key levels below where key necklines simultaneously are associated with the DCF scenarios that I have calculated.
The current stock price (200) implies that the Buy Side does not have much confidence in the Sell Side Equity Research forecasts of 15% EBITDA Margins for TSLA (which would result in a 260/shr).
TSLA is dependent on consumer sentiment, the job market, and China’s macro landscape.
If I reverse-engineer the DCF, the implied EBITDA margin that the stock is telling us right now is that Tesla’s margins is around 11%, about 30% lower than consensus.
Conclusion: As we approach 150-170, assuming that it continues a downtrend, those levels will be too close to the bear case of 7% EBITDA margins, and will merit more attention on the company to trade the long side.
My Personal Playbook on TSLA:
Risk-Averse: Sell Long-Term Puts at strikes 140-150. 160-165 is okay too if markets are firm.
Risk-On: Look for TSLA to see 175-180, and then buy LEAP calls for 190 Strike. We want to choose strikes where the probability it goes at-the-money/in-the-money is high.
Direct Shares can be considered at 140-150, where I think that represents margin of safety.
Today at 200, the stock can work, but depends on investor perception towards the EV industry.
At #7 component (2.77% weight) for NQ (Nasdaq-100), I view Tesla weakness as not a gigantic problem for the market.
For Mag7 so far, the DCF Model prefers AMZN/MSFT (and even NVDA) to AAPL/TSLA.
Hope you enjoyed this analysis. Have a great weekend. More DCF research next week.
-Larry