Tesla’s Embedded Assumptions: What Investors Need to Know

During their latest episode of the VALUE: After Hours Podcast, Trainer, Taylor, and Carlisle discussed Tesla’s Embedded Assumptions: What Investors Need to Know. Here’s an excerpt from the episode:

David: I think Tesla’s a meme stock. I think Netflix is a meme stock.

Tobias: Let’s talk about Tesla. Do you know off the top of your head, what are the embedded assumptions in Tesla?

David: Yeah.

Tobias: Can you look it up in that one?

David: That one what we like to do is actually boil it down even further. So, Nvidia is easy to think about cash flow, but the cash flow growth for Tesla is so absurd. It’s like, it doesn’t even make sense. What I can tell you is the implied vehicle sales. By 2032 is around 28 million, depending where the stock price is. 28 million electric vehicles a year. By 2030– [crosstalk]

Tobias: To justify the stock price.

David: To justify the current stock price.

Tobias: That’s globally?

David: Global. At margins that are higher than Toyota. And then the other thing to keep in mind is that I think the entire electric vehicle market is expected to be maybe 30 million in 2032.

Tobias: So, they’re expecting to own a lot of that market?

David: Yeah. If you assume a lower margin, if you assume a lower average selling price, I think we’re assuming something like the average selling price of a new car in the US or something like that, or I think it’s maybe even a little bit higher. You get to way bigger numbers, like, more than 100% market share. You think about firms that have that kind of market share, it’s not Mercedes, it’s not Cadillac, it’s not high-end fancy cars like what Tesla sells for the most part. It’s the run of the mill car. It’s got to be available to the masses. Tesla struggled in that area, struggled mightily in that area. So, those are the expectations baked into the Tesla stock price. It’s been like that for a long time. Then of course, the argument is, “Oh, they’re going to get in all these other businesses.” That’s been the argument for 10 years and it still hadn’t happened.

Jake: It’s a lot of capital to get from whatever they’re making now at a million cars or something to $30 million? It’s a lot of factories to build.

David: It is, and they’re nowhere near on pace to be at the capacity production level they need to sell that many cars. I think in our model, we assume some super conservative low capital allocation.

Jake: Expense. Yeah.

David: We do that mostly, like, especially in a lot of our zombie stocks and danger zone stocks, we just try to make the scenarios just so optimistic, so no one can say like, “Whoa, you did this. That’s why it looks expensive.” You don’t have to do that with a lot of these stocks. Didn’t do it at all.

Jake: [laughs]

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