- The speaker describes valuation as a craft and mentions that they have learned a lot about valuation through analyzing Tesla.
- They admit to making incorrect valuations of Tesla in the past.
- Three lessons they have learned about Tesla are that the company has reinvented manufacturing in the automobile industry, has a loyal customer base, and has a unique CEO.
- The speaker discusses how Tesla's value is influenced by the story and perception of the company, rather than just financial numbers.
- They mention some questionable decisions made by Tesla, such as borrowing money and setting arbitrary targets.
- The speaker shares their personal experience of investing in Tesla and their valuation of the company.
- They revisit their valuation in January 2023 and conclude that the value of Tesla is around $150 per share.
- They discuss the fluctuations in Tesla's stock price throughout 2023, with some periods of growth and others of disappointment triggered by earnings reports.

- Tesla's recent earnings reports have been disappointing, causing a drop in stock price.
- The growth surge seems to have leveled off and profit margins are declining.
- Three major news stories have implications for Tesla's story and valuation: aggressive price cuts, work on full self-driving technology, and the introduction of the Cybertruck.
- The Cybertruck has generated excitement and interest, with nearly 2 million people expressing interest in buying it.
- However, there are potential downsides to the Cybertruck, including lower margins and the need for additional production facilities.
- The success of the Cybertruck will depend on strong demand and the target market.

- The author discusses three key topics related to Tesla: Cybertruck sales, full self-driving technology, and price cuts.
- The success of Cybertruck sales depends on whether they attract new truck buyers or cannibalize sales from other Tesla models.
- Tesla is ahead of other automakers in terms of full self-driving technology, but rushing its release could have negative consequences.
- Price cuts have divided opinions among Tesla supporters, with some believing they have strategic benefits and others seeing them as a tactical move.
- Tesla is positioned as a dominant player in the electric car market, with higher profitability than traditional automakers.
- The energy business, specifically solar generation and storage, is profitable but capital-intensive for Tesla.

- Tesla's return on invested capital is 6%, reflecting the capital intensity of the business.
- Tesla's revenue growth in the energy business is strong, with increasing margins, and the potential for future growth lies in the storage business.
- Tesla has a technological edge over competitors in the energy and software sectors.
- The auto software market is expected to grow to $120 billion by 2023, and Tesla is well-positioned to capture a share of this market.
- The ride-sharing business is currently unprofitable, but robotaxis could offer a different economic model without drivers.
- Tesla could enter the robotaxi business either as a standalone company or as a partner to a ride-sharing company.
- Tesla's electric car business is expected to continue growing and gain a significant market share, with revenues projected to reach $500 billion in 2033.
- Tesla's margins in the auto business are estimated to be around 10%.
- Tesla is expected to pivot towards storage solutions in the energy business, with revenues projected to be $80 billion in 2033.
- Tesla's auto software business could generate revenues of $40 billion, with estimated margins similar to enterprise software companies.
- The potential revenues from Tesla's robotaxi business are capped at $80 billion, with expected high operating margins.
- Based on a breakdown of Tesla's four business segments, projected revenues could reach $735 billion over the next 10 years.
- The estimated value per share for Tesla is $180, lower than the current market price, but the author is willing to wait for a potential further drop in stock price.
- The author believes Tesla offers more upside potential than downside risk, making it a worthwhile investment at fair value.
- The author encourages readers to modify and play with the Tesla valuation spreadsheet provided.

- The speaker has created a spreadsheet for valuing Tesla and encourages others to modify it to fit their own opinions.
- They are currently waiting and hoping to have Tesla in their portfolio soon.
- They express gratitude for the audience's attention and hope they enjoyed the session.

- The speaker discusses their learning about valuation through analyzing Tesla and admits to past incorrect valuations.
- Three lessons learned about Tesla are its reinvention of manufacturing, loyal customer base, and unique CEO.
- Tesla's value is influenced by its story and perception, not just financial numbers.
- Questionable decisions made by Tesla include borrowing money and setting arbitrary targets.
- The speaker shares their personal experience investing in Tesla and their valuation of the company.
- The value of Tesla is estimated to be around $150 per share in January 2023.
- Fluctuations in Tesla's stock price have occurred throughout 2023, with periods of growth and disappointment triggered by earnings reports.
- Recent disappointing earnings reports have caused a drop in Tesla's stock price.
- The Cybertruck, aggressive price cuts, and full self-driving technology are major news stories impacting Tesla's story and valuation.
- The success of the Cybertruck depends on strong demand and the target market.
- Tesla is ahead in full self-driving technology, but rushing its release could have negative consequences.
- Price cuts have divided opinions among Tesla supporters.
- Tesla is positioned as a dominant player in the electric car market with higher profitability.
- The energy business is profitable but capital-intensive for Tesla.
- Tesla's revenue growth in the energy business is strong, with potential future growth in the storage business.
- Tesla has a technological edge in the energy and software sectors.
- Tesla could enter the robotaxi business as a standalone company or partner.
- Tesla's auto business is expected to continue growing and gain significant market share.
- Tesla's estimated value per share is $180, and the speaker believes it offers more upside potential than downside risk.

If valuation is a craft, there is no better company to hone that craft on than Tesla. I have valued Tesla almost every year since 2013, and while I have been woefully wrong on occasion, I return to the scene of the crime, to do it again. I review my 2013 valuation of Tesla briefly, before looking at lessons learned in subsequent valuations (story stock in 2016, corporate teenage in 2019, trillion-dollar wonder in 2021 and back-to-earth in January 2023). I then look at what this year has brought for Tesla, both in the market (a soaring first half of 2023, followed by stumbles in the second half) as well as as news (earnings reports and news stories). I focus in on three big news stories - the price cuts, the much-debated advances in FSD and the Cybertruck, and use those stories to reframe the valuation of the company, breaking it down into four businesses (auto, energy, software and robotaxi). With pathways (optimistic, albeit plausible) pathways to success in each business, I estimate a value per share of about $180. Needless to say, you will disagree with me on almost every part of my story, but use the spreadsheet which is attached to make it your own. 
Slides: https://pages.stern.nyu.edu/~adamodar/pdfiles/blog/TeslaOct2023.pdf
Blog Post: https://aswathdamodaran.blogspot.com/2023/11/tesla-story-turns-and-twists.html
Valuation of Tesla: https://pages.stern.nyu.edu/~adamodar/pc/blog/Tesla2023OctDIY.xlsx

When I teach my classes on valuation, I start by describing valuation as a craft.

And the essence of a craft is you learn by doing.

And there is no company where I've practiced the valuation craft more than Tesla.

It's a company where I've learned more about valuation than I have about the company.

Now along the way as I've valued Tesla multiple times over the last decade, I've got it hopelessly wrong sometimes.

And I'm sure some of you will stop right now and say, why should I listen to this guy and get it wrong again?

At that time, I valued Tesla as a luxury automobile company, as a successful luxury automobile company.

In fact, while it had very little revenues, was losing large amounts at that time, I predicted that 10 years out, which would make it 2023, revenues of 65 billion and an operating margin of 12.5%.

You're welcome to compare it later on in this session to what the actual numbers came in at.

But the value for the equity that I got was less than 10 billion for the company.

Part of the reason the equity value was depressed was because I estimated large amounts of reinvestment that Tesla would need to make to get to that revenue of 65 billion dollars.

Now as I value Tesla each time I've done it I've learned a little bit more about the company.

If I were to summarize the 3 big lessons I've learned about the company, here are the 3 lessons.

The first is Tesla's reinvented how manufacturing is done in the automobile business.

The old-time automobile companies built huge and inflexible assembly lines, capital intensive, and then used them to churn out more and more cars.

Tesla has been able to grow with vastly less reinvestment than the typical automobile company.

Second, the Tesla customer base is loyal to a fault.

Not only are they loyal in terms of being loyal to the brand, they're evangelists.

They seek out friends and try them to buy Tesla's as well.

In fact, Tesla's biggest sales force is its own customers.

And third, Tesla has a CEO that I'm going to describe as unique.

In a world full of CEOs who lack vision, and in fact are walking examples of the Peter Principle.

Remember the Peter Principle is you rise to the level of your incompetence?

He has enough vision to power a hundred CEOs, but he isn't eccentric and he does things his way.

Now 1 of the things I've learned about Tesla as I've gone along also is it's a story stock.

The value that you attach to Tesla is not just a function of the numbers you see for the company but the story you tell about where the company is going.

In fact, in 2016 I wrote a post on Tesla where I talked about the different stories you could tell about the company.

Is it an automobile company, a technology company, an energy company?

Is it focused on the high-end customer base or the mass market?

Is it competitive edge that it's the first company out there?

Does it invest like a manufacturing company?

Does it invest like a technology company?

Is the risk that of an automobile company the risk that of a technology company?

Those choices will drive the inputs into evaluation, into growth and margins and reinvestment and risk, and ultimately play out in value.

In fact, in that 2016 post, I showed how different stories about Tesla could play out as very different estimates of value.

Now, the values themselves right now are not relevant because this was 2016.

But the point I was trying to make is when people disagree about what Tesla is worth, they're not disagreeing about a growth rate, they're disagreeing about the fundamental story about the company.

Now, if you've been a Tesla investor or even an observer of Tesla, along the way Tesla sometimes does things that make you look and say, what?

I remember in 2017 when Tesla chose to borrow money.

Tesla chose to borrow money in 2017 when it was a money losing company And equity markets loved it.

Tesla also, if you remember, often sets targets for itself that you look at.

It's not Tesla that often sets the targets.

I remember Elon Musk setting a target that Tesla would meet, 5000 cars a week, completely arbitrary.

And then Tesla twisting itself into a pretzel trying to deliver 5000 cars a week.

Now sometimes the damage was self-inflicted.

You know, when Elon Musk tweeted out, and Twitter has been a classic platform for Tesla getting itself into trouble.

He tweeted out that we had $420 funding secured in 2018.

A tweet that said in motion a sell-down on the stock.

In fact, in 2019, the stock had dropped to $180 per share.

Unfortunately, you can't compare prices now to prices then because you've had multiple stock splits.

But at that time about $32 billion in equity.

And I actually bought Tesla for the first time because I found it undervalued.

At the time that I bought it though, I described Tesla as my corporate teenager.

If you remember your teenage years or your kids were teenagers, remember it's the job of every teenager to look in the mirror and ask, I have lots of potential, what can I do today to screw it all up?

And what I was trying to say was I was investing in Tesla with open eyes, knowing that this was a company that could make frustrating choices for me as an investor.

Now, 6 months after though, Tesla surprised me.

The stock went up 5 fold over the next few months.

And I sold far too soon, just ahead of COVID.

And in fact, during COVID and the months after, Tesla took off.

By November of 2021 Tesla was on top of the world, a trillion dollar company.

I regretted, I guess, not holding it still.

I was just curious about what Tesla had done to become a trillion dollar company.

And at that, you know, in that valuation I concluded that, you know, that it was plausible for Tesla to be worth the trillion dollars.

But what would have to deliver to get to the trillion dollars was mind-boggling.

It would have to deliver 600 to 800 billion dollars in revenues and margins of 24 or 28 percent.

In other words, it would have to have revenues like an automobile company, the largest automobile company in the world and beyond, and margins like a very successful technology company.

I concluded that post by saying I love Tesla as a company but not at a trillion dollar market cap.

By the end of 2022 leading into 2023 Tesla was back in trouble.

Its market cap had plunged by more than 60 percent and people were talking about when will we hit bottom.

So I revisited my Tesla valuation in January 2023 and at that time I valued the company at about a hundred.

So I ran a Monte Carlo simulation and those of you familiar with my post you know will recognize the simulation where I take an intrinsic valuation and I then allow for the fact that my assumptions could be wrong.

And my January 2023 valuation of Tesla I concluded that the value that my median value my middle my base case valuation be about a hundred and 50 dollars per share.

Now about 4 weeks before my valuation of the stock I'd actually hit a hundred dollars per share but I came in a little too late with this valuation because by the time I valued the company the stock had already shot through the 150 And I lost my chance in a sense to buy Tesla then.

And 2023 has been an unusual year for Tesla.

Coming out of January, those lows, it had a period where prices went up and up and up.

In fact, for the first half of the year, Tesla did really well.

It was 1 of the 7 stocks powering the market.

And by the end of June, early July of 2023, the stock was close to $300 per share.

That's almost tripling over the course of the year.

In the last few weeks, perhaps the last 2 or 3 months, the companies clearly hit some ground swells and especially in the context of earnings reports coming out across the course of the year.

In fact, in this graph, I've superimposed the 4 earnings reports that Tesla has had during the course of the year.

The first 1 in January was the 1 that triggered the upsurge.

Actually Tesla came in at expected, but the last 2 earnings reports have been disappointing and I've listed out what analysts had to focus on earnings per share even though with Tesla it's not the earnings per share that we should be looking at but the but but the more the deeper numbers but the the last earnings report has clearly triggered a wave of selling in the stock, and the stock is, at the time that I valued the stock, had dropped below $200 per share.

Now, clearly, there's financial news that's come out about the company that needs to be brought into the picture.

So in this graph, I've looked at Tesla's quarterly data going back to 2013.

But I want to emphasize just what's happened in the most recent quarters in the table at the bottom.

So if you look at the fourth quarter of 2022 and the first 3 quarters of 2023, which are the 4 quarterly numbers that we've seen reported this year, You can see that Tesla's growth has leveled off from the post-COVID surge that you saw, but it's still healthy.

In fact, if you break Tesla down into its automobile and services business and the energy business.

The automobile business is its growth is down in the third quarter.

Growth was actually high single digits, but it's growth that most automobile companies would kill to have.

Similarly, margins have leveled off in 2023.

In fact the third quarter of 2023 margins were for the automobile sector were the gross margins were down and the overall margin for the company had dropped below 10%.

So if you look at the collective evidence for the year, it's that growth, the growth surge seems to have leveled off and profit margins are declining.

So that's a financial news that's come out about the company.

But Tesla, it's almost never just about the financial news.

There'll be news story, there'll be news story after news story on the company.

And if I were to take the 3 biggest news stories, and this in my judgment of the 3 biggest news stories, they all have implications for Tesla's story and valuation.

The first was during the course of 2023, Tesla's very aggressively cut prices on its offerings especially on its lower priced models and and if in fact if you look at after the price cuts and you know even without the credits considered Tesla Tesla's are now competitive on a purely price basis with mass automakers in the US and so they've been price cuts.

We'll come back and look at the effects of those price cuts.

Those price cuts might have contributed to the drop in margins we saw in the numbers.

The second and this is the second big story that's run through the course of the year has been Tesla's work on FSD, full self-driving.

Now I know that that much of this is driven by social media but it's undeniable that more than any other automobile company Tesla has put this FSD story out there and we can debate how far ahead or it is of the competition and FSD.

In fact there's a divide on what Tesla has done in full service driving.

Tesla advocates believe that Tesla is way ahead of the competition on full service self-driving.

And Tesla's critics argue that it's really just self-promotion.

That Tesla is nowhere as far as it claims to be and that it's it's dangerous to push this to the forefront.

No matter what though Tesla is the only automobile company that seems to have made FSD part of its long-term story.

That's actually thinking about bringing it into its business model.

In fact, Tesla has offered a beta version of FSD to its drivers for $12,000.

But Tesla clearly is thinking about making this part of its revenue model in its business model.

So that's the second big story and we'll talk about how that plays out in the value of Tesla.

Now as many of you know I'm not a big automobile fan.

I barely drive and to me you know waiting for a car seems like something I shouldn't be waiting for.

But there are clearly people who love their their automobiles and the Cybertruck clearly has got lots of attention.

First because of its novelty, the way it's designed and second because it represents Tesla's entree into a market, the truck market that it's hitherto stayed away from.

And that's a market where the legacy automakers still have a very sizable presence.

So you've got price cuts, you've got full self-driving and cyber trucks.

And the question is how does this play out in the numbers and the value for Tesla?

I do think though it's time for a reset that what we've learned about Tesla since the start of 2023 has to be built into value and the question is how best to do it.

Now so far when I value Tesla and all of my valuations I value Tesla as a single business company, as primarily an automobile company.

So I haven't broken Tesla down into businesses and I've been taken to task for this.

That said though, it doesn't mean I haven't incorporated the other businesses into my valuations.

In my January 2023 valuation, the revenues that I give Tesla include revenues from robo taxis and from software or other businesses and my margins that I gave tip for Tesla of 16% marginal well above automobile margins and reflected the higher margins of these new businesses So I've buried the other businesses in my inputs.

But I do think, given what we've seen in Tesla in 2023, that it's time for me to break these businesses out and deal with them individually.

I'm going to break Tesla down into businesses and look at each business separately because each business is very different operating characteristics.

Now before I do that I want to talk a little bit about how the new stories that have come out during the course of the year will play out in those businesses.

I'm going to break Tesla into 4 businesses.

The automobile business and obviously you know what that includes electric cars, the cyber truck if it makes it.

The second business I'm going to look at is the energy business which has been there since you know especially since 2016 but it's been a small business but the way it grew in 2023 I think it deserves to be taken seriously as a standalone business.

The third business I want to I'm going to look at is software you know coming from the fact that Tesla for better or worse is pushing full self-driving as software that people can either buy perhaps a subscription model and the fourth is robo taxis and whether this advance the advances that Tesla has made again I know there's debate about it can translate into a large and profitable robo taxi business.

Now I'll take each of the 3 news stories I talked about and talk about how they might affect my storylines.

I'm going to start with the easiest 1 the Cybertrucks.

Now clearly there is there's a lot of excitement about Cybertrucks at least among the subset of the population.

In fact Tesla has a tracker on its website where you can track reservations people have made.

Now take this with a grain of salt because a lot of people who make reservations don't carry through and actually buy the truck.

But I think at last count when I looked at the tracker there were almost 2 million people on who were interested in buying the Cybertruck.

Now even if only 1 tenth of those people actually buy, that's a pretty hefty increase in sales from Cybertrucks alone.

Now just as a note of caution though, so while the plus is the Cybertruck will be expansion into a segment of the market where Tesla has not had a presence, the truck market.

There are downsides in this new product and Elon Musk in the most recent earnings call was actually surprisingly down on the Cybertruck in terms of value.

Perhaps he was just the day in and the mood that he was in.

But he did talk about the potential downside.

And I can see at least 2 things that have to be considered in the value-adding potential of the Cybertruck.

First is it is entirely possible, I mean we don't know yet, that at the pricing that we're talking about for the Cybertruck and it's still rumored 50,000, 45,000 and 55,000, The margins in the Cybertruck will be lower than the margins at least on the high-end automobiles that Tesla sells and if this diverts attention away from those higher margin products, Tesla could suffer as a company.

The second is, and I'm not an expert on this, it looks like the Cybertruck will require its own production facilities.

I think the Texas factory is the 1 that's producing the Cybertrucks which will require more reinvestment in the future.

I'm not saying these negatives outweigh the positives but they have to be factored in.

If Cybertruck sales are brisk and demand is strong, the positives will outweigh the negatives.

But this is the second factor to consider is who's going to buy these Cybertrucks?

I mean think of a Venn diagram right and let's think of 3 portions of the diagram.

1 are truck buyers, the second are you know people who buy Tesla cars and the third is Cybertruck sales.

If the bulk of Cybertruck sales come from truck buyers, Tesla would gain from the Cybertruck because it's drawing in a new market and it's getting market share away from others.

If the bulk of the Cybertruck sales are coming from people who have bought other Tesla models, then it's more product cannibalization.

So that's going to be an interesting thing to watch is who's buying the Cybertrucks.

Now on the plus side, Tesla is clearly further along the road than any other automobile company not just from a technological standpoint but also from a business model and a marketing standpoint.

I know there are people who argue that maybe Google is further ahead and with their Waymo on.

But the reality is Google's not a car company.

It's not a company that's going to jump into this business.

Then Tesla seems to be the only automobile company that's taking this as a serious part of the model.

Maybe that's a that's a mistake that Tesla is making but clearly it's out there.

Now I don't think that at $12,000 a piece Tesla will sell it'll be a niche market if it's $12,000 but maybe in 2000 or 3000 this could be a source of software revenues for Tesla.

And if Tesla actually manages to succeed with full self-driving, there's another business that opens up, which is the robo-taxi business.

I mean, think about your Uber or your Lyft, right?

80% of the fare goes to the driver who owns the car and 20% goes to Uber or Lyft.

Think of an alternate model where you get into a car where there is no driver.

So already that 80% is yours as the company that owns the car.

The promise of the robo taxi business is without the drivers ride sharing becomes a very profitable business and if Tesla is further ahead than everybody else maybe they can dominate the robo taxi business.

Again I'm not jumping ahead of myself so that's on the plus side.

On the minus side there is a very real chance that if Tesla rushes FSD to the market before it's ready you know it's going to be you know it's going to be catastrophic because all you need are a couple of high profile accidents and you've set back the cause of full self-driving for 5 years, maybe even 10.

So we're not quite ready to for full self-driving on scale yet.

And the question is when will we be ready, if at all.

And this is I think the action where I've seen more disagreement among Tesla bulls than any other Tesla action that I've seen in Tesla's history.

Now usually when Tesla takes an action, the Tesla Bulls rush to defend it, the Tesla Bears rush to attack it.

But the price cuts have created a divide even among people who are Tesla true believers.

And part of the reason is everybody's looking at a piece of the puzzle and they're looking at different pieces.

So what I've done in this graph is actually look generically at how a price cut can affect value.

So you're a company with products or services, you cut prices.

Your first order effect is always negative because when you cut prices you're going to reduce your margins, you're going to reduce profits, earnings, cash flows and reduce value.

Let's look at the possible second order effects.

There's a tactical effect which is when you cut prices you could increase volume and if you increase volume enough you might make up for the price cut with much higher volume, end up with higher revenues and perhaps higher earnings and cash flows.

Now to think about what determines it, the first is the elasticity of demand for your product.

If you have a product with elastic demand, then cutting prices will increase value.

But it also depends on how comparative the business is.

If you cut prices and all your competitors also cut prices, you all end up with lower margins and none of you ends up getting that volume boost that you wanted.

So the value effect of price cuts, if your objective is tactical, will depend upon whether the unit sold increased more than proportionately to your price cuts and maybe you get some economies of scale where you actually reduce your costs per unit of producing it.

Now if you think about applying this to Tesla, at least over the course of 2023, the price cuts haven't shown up as high a volume.

You know, Maybe the automobiles are not that elastic, the demand is not that elastic.

Maybe it will take time, but that's a tactical factor.

You cut prices because you want to handicap your competitors.

You make it more difficult for your competitors to stay in the business or enter the business.

Now the effect you know of a strategic price cut will depend largely on how easy it is for people to enter your business and exit from your business.

In businesses where entry and exit is easy, then these strategic actions have much bigger consequences because it deter new competitors from entering and make existing competitors leave.

Now the value effect of a strategic price cut where you're trying to get a higher market share is in the long term if a strategic price cut works and you're compared as a handicap you will end up with a higher market share and higher revenues potentially higher value.

Now you can play this through with Tesla and You could argue that the price cuts have had their intended effects on the legacy automakers who already are in trouble in the electric car segments and trying to make money.

And there's a third component, which is when you cut prices for your products if there are side businesses that you have that benefit from the price cuts what you make on those side business could make up for what you lose in terms of margins in your product.

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A Tesla Revisit: Story Twists and Turns with Value Consequences