Summary
Tesla has always been a very difficult and complex company to value, and still is today, and not only because of the mercurial nature of its founder and CEO…. Is it an exciting tech company, just a car company, a battery company, a space company, etc.?
Context
This case from 2016 refers to public research reports from leading investment banks and industry experts and is a great way to practice your valuation skills (note that the research reports use the same basic valuation techniques we discussed in class: DCF and comparable companies trading multiples). The company is looking to raise money via a secondary equity offering and some of the banks providing valuations are competing for the underwriting business.
The case (exhibit 3) presents a wide range of valuations for Tesla in 2016, from $160 per share to $500 per share, implying long term growth rates between 25% and 100%. Even wilder are the estimates for 2018 EPS, ranging from negative to $13.72!
Valuations
The case looks in more detail at 2 valuations done by J.P. Morgan and Morgan Stanley in 2016 based on projections for XXXXXXXXXXThe Assignment is asking you to re-calculate the valuations based on the actual data.
J.P. Morgan’s valuation is presented in detail in Exhibit 4 of the paper case “Tesla: Financing Growth”. For the 2016 valuation, use the data provided in the paper case. In addition, we’re providing you as a very helpful tool a spreadsheet containing the 2016 data. You can use this or create your own model in order to do the assignment.
The most important assumptions used by J.P. Morgan in 2016 are:
· Free Cash Flow projected for XXXXXXXXXX
· Terminal Value in 2020
· WACC of 12.5% (Risk free rate of 2.5%, Beta of 1.5 and market risk premium of 7.5%); (cost of debt 1.5%, tax rate 24%; capital structure 90% equity and 10% debt)
· EV/EBITDA multiple of 8
· P/E Multiple of 13
· Price/Sales Multiple of 1.75
Place yourself in time at the exact moment of J.P. Morgan valuation, May 2016. But this time, with the advantage of the hindsight, instead of using projections for the interval XXXXXXXXXXuse the actual financials for the intervening years; and re-calculate the J.P. Morgan valuation and see how it compares to the 2016 forecasts.
To get the actual financials you can use any of the free finance sites on the internet – for example Yahoo Finance where you can find up-to-date and historical financial statements.
Note Bene: the stock of Tesla had a 5 for 1 share split after 2016. Using the actual financial data will account for the split and therefore the multiple answer choices below are also accounting for it.
We understand that the actual financial data will be presented slightly differently on sites, so we are not looking for exact accuracy, just your research and process skills!
In particular, please perform the following calculations:
1 Re-calculate the fair share price as per Exhibit 4 (C) using EV/EBITDA Multiple. What is the implied share price for 2018? Choose one answer from below:
around $100/share
around $500/share
around $60/share
around $4/share
2 Re-calculate the fair share price as per Exhibit 4 (D) using Price-to-Earnings Multiple. What is the implied share price for 2018? Choose one answer from below:
etween $50 and $ 80 per share
etween $0 (or negative) and $30 per share
etween $150 and $180 per share
etween $ 200 and $ 250 per share
3 Re-calculate the fair share price as per Exhibit 4 (E) using Price-to-Sales Multiple. What is the implied share price for 2018? Choose one answer from below:
etween $ 20 and $ 50 per share
etween $ 60 and $ 90 per share
etween $300 and $350 per share
etween $150 and $ 180 per share
4 Re-calculate the fair share price as per Exhibit 4 (G) using Discounted Cash Flow analysis. It might be more than one co
ect answer. Choose all that applies.
etween $75 and $150
etween $150 and $200
etween $450 and $500
etween $300 and $ 375
5 What do you think about the choice of comps in the JP Morgan valuation?
6 Which investment bank came closest back in 2016?
7 How did the stock perform relative to the predictions in 2016? Be advised that the stock suffered a split of 5 for 1 share after the year of reference, 2016.
8 What factors were most important in changing the financial performance?
9 Re-calculate the Morgan Stanley valuation (base case only) as per Exhibit 5, from the paper case "Tesla: Financing Growth".
Microsoft Word - Q&A Tesla Assignment.docx
1
Tesla Assignment
Q&A
I. Students: What is the focus of this exercise?
When it is asking for "actual data", are we to go to the internet for 2016 financials and use that
data to complete a valuation of Tesla for XXXXXXXXXX? Or are we supposed to go back and create
2016 using the 2015 data from Tesla papers?
Exhibit 4 in the excel sheet has the 2016E, 2017E and 2018E results already calculated. The
excel sheet says, "Actual data to re-calculate". Again, is this an exercise to go to the internet
and pull financials from that period and fill in the information?
To complete the assignment, are we solving for just the items on the sheets "Exhibit 4 Multiples
J.P. Morgan" and "Exhibit 4 DCF J.P. Morgan" using the data from the additional pages? The
"Background" sheet seems to have missing data, but there do not appear to be any
equirements to fill in this detail.
Answer:
The focus of the exercise is to practice valuation. Students can study the Tesla case presented in
the paper and understand the valuation performed at that time by J.P. Morgan. After they
understand the valuation, they are asked to collect the actual financial data for Tesla and
eplace the projected data used by J.P. Morgan in their valuation with the actual data. Once
they have done that, students are to re-calculate the valuation done by J.P. Morgan. For
example:
In the paper case, J.P. Morgan projected the FCF for the valuation window XXXXXXXXXXas below:
As part of the exercise, students could go on the Yahoo Finance website for example, and pull
out the actual FCF for the period as follow:
And so on and so forth with every financial data relevant for the valuation. Some hints on what
kind of data students will have to look for and recalculate are mentioned below each question
in the Quiz (see the Optional ru
ic where students are invited to write their assumptions).
For the purpose of the exercise, assume that it is year 2016 and instead of using the financial
data projected at that time by J.P. Morgan to perform the valuation, students could use the
actual historical data for Tesla for the valuation window. For the multiple valuation, the
timeframe is XXXXXXXXXXFor the DCF calculation, it is XXXXXXXXXX, as per the paper case.
2
The excel that we’ve provided is really just collecting the data into a spreadsheet. The students
can use that one or their own models - as we specify in Quiz instructions.
The “Background” tab in the spreadsheet we have provided has some spare data collected from
the paper. Students are not asked to do anything with it.
II. Students:
For the Multiples calculations Exhibit 4 Multiples JP Morgan sheet, using actual financial data
for XXXXXXXXXX, should we use the same multiples (e.g., 8x for EV/EBITDA, 13x for P/E and 1.75
for Price to Sales) or calculate updated multiple values for each year based on actual results?
Answer: We have re-calculated the multiples based on the actual data, i.e. based on the actual
market data in respect of EV and actual EBITDA, for example.
III. Students:
Similar question for the WACC Calculation on the Exhibit 4 DCF JP Morgan, should we use the
same Risk-Free Rate, Beta, Market Risk Premium, Cost of Debt, Cost of Equity, tax rate and
Debt/Equity percentages listed in the original values or find actual cu
ent 2020 values for
those items?
Answer: We have re-calculated the WACC. The students can decide to re-calculate or make an
educated choice on the value of WACC that they decide to use. Please justify the choice using
elevant models discussed in the course.
IV. Students:
For the 2020 DCF calculation, is it acceptable to use reported Free Cash Flow values from a
source such as Yahoo Finance, or do you want us to calculate the value of FCF using the method
shown in Exhibit 4 DCF analysis (Op cash flow – capex + cash)?
Answer: It is acceptable to use the reported FCF from a source such as Yahoo Finance.
V. Students:
Can you please explain the note in cell B46 of Exhibit 4 sheet “Account for the 5 for 1 split.” I
am unclear what we need to do to account for this, since we are calculating actual multiples
values only for XXXXXXXXXXand the 5:1 split occu
ed in August XXXXXXXXXXShould we divide the
Multiples and DCF results by 5 to be comparable with the cu
ent 2020 stock price?
3
Answer:
We have re-calculated the multiple valuation using the actual number of shares, i.e. the
number of shares after the August 2020 split.
Therefore, for the price/share to be comparable with the price/share that J.P. Morgan reached
in their 2016 valuation, we should multiply it by 5. But this is just for comparison purposes and
to answer the question in the quiz that is asking students to say which investment bank came
closer in their valuation in 2016.
In the quiz, students are asked to pick an answer choice that reflects exactly the value they
have re-calculated, without any multiplication or division by 5 (provided that the students are
using the actual number of shares, i.e. the number of shares after the split).
VI. Students: Inaccurate actual data
Answer: Not all the financial data that are to be found on the internet are 100% accurate or
different sources can provide slightly different values. Don’t wo
y about that. While we have a