As the Tesla (TSLA) three-ring circus continues to perform daily, the shares are getting hammered again in today's trading. With TSLA shares trading at nearly $100 per share below Elon Musk's offer of $420 per share, it is clear that the market does not believe he has "funding secured." Musk's bizarre behavior of late was amplified by the weirdness of his interview with the New York Times, published Thursday.
Tesla's historic lack of profitability and cash burn -- $6.3 billion in the past 18 months, by my calculations -- make judging a "support level" for TSLA shares very difficult. Frankly, I don't think there is one.
As an analyst, though, I have to ask myself what Tesla would be worth if there were no Musk premium (which appears to be turning into a discount) and Tesla were valued truly on its fundamentals? It's not $420 per share, and that fantastical valuation of 25x 2019 EBITDA had many wondering about Musk's mental state when he wrote his "funding secured" tweet on August 7th. He addressed that in the NYT interview, but certainly didn't put the issue to bed.
So, what if Saudi Arabia's Pubilc Investment Fund -- or as yet unnamed others -- do not come up with funding for Musk's mooted go-private deal? Well, you are seeing this week what a lack of faith will do to an inflated stock, but Tesla's lack of profitability makes it difficult to value.
It is extraordinary that an industrial company could operate with negative EBITDA as Tesla has for the last six quarters. From a financial perspective, a company that does not cover its interest expense with EBITDA (the best proxy for near-term operating cash flow) is just a zombie.
With increasing production of the Model 3, I believe Tesla will approach breakeven (excluding proceeds from sales of ZEV credits) in the third quarter, but still fall just short of producing an operating profit. The slight loss that I am modeling for TSLA for 3Q2018 is still not even close to covering the $170 million of interest expense budgeted for the quarter by TSLA CFO Deepak Ahuja.
So, we have to go to the out years to try and find something that can be valued. According to Factset, consensus for Tesla's EBITDA for 2019 is $3.25 billion. That would reflect a margin of about 12% on forecast sales of over $28 billion, a very low margin for the auto industry, especially at the high end. As low as that margin would be, I believe the consensus numbers are far too optimistic in the face of increasing competition and dwindling U.S. tax credits for Tesla purchasers, and my model shows an EBITDA of about half of the Street consensus.
If we look at Ferrari (RACE) , which carries a gross margin north of 50%, and is estimated to have an EBITDA margin of about 33% this year, we can see that the stock is trading at about 15x 2019 EBITDA. Tesla bulls can feel free to contact me about the relative merits of using Ferrari as a comparable for TSLA, but GM (GM) is trading at about 3.0x 2019 EBITDA on my numbers, so there are much more unfavorable comparisons that could be made. GM is light years ahead of Tesla in the race to mobility-as-a-service with the success (and investment from SoftBank) of its Cruise division, but the market is giving the Detroit giant absolutely zero credit for that.
But, I'm not going with a GM valuation for Tesla, just a Ferrari. Assuming a 15x EBITDA multiple and using the consensus EBITDA forecast for TSLA and subtracting net debt, yields a fair value for Tesla of $235-$240 per share. Again, though, that is in comparison to a massively profitable company, so I would think the market would have to document that significantly. Assuming a 20% discount and the presence (tearful or otherwise) of Elon Musk, that would put a fair value of Tesla in the $180-$190 per share range.
Without a Musk premium, the implied multiple should be lower, and I would put Tesla's "hero worship-free" fair value in the $150-$160 range. At that level I believe Tesla shares would become attractive to competitors, an incredibly well-financed group of global automakers that have been notably absent from the speculated partners in Musk's go-private transaction.
So, those are the hard numbers. The market's perception can change, and I predict fearlessly that it will, but ultimately numbers do matter.