Hey guys, it's sasha, i have just watched 100 youtube videos about tesla's share price and, after wasting an entire day of my life, i thought i would summarize how bad some of these videos were, so that you don't have to watch them now. I've graded these videos on a sophisticated scale that ranges from complete noob to pro level and i'm sorry to report that the vast majority of the stuff out there is in the complete new category. So in this video, i'm gon na break down the mistakes that these people make and i'm gon na walk you through how to value tesla level all the way, starting from noob up to pro and i'll, explain the pros and cons of each of those steps. All i need from you before we get started is just to go and tap that like button, i watch tesla evaluation, videos non-stop for 16 hours and if it only takes 1.7 seconds of your time to go and turn that, like button blue, that means that hitting That, like button, represents a mind-blowing 3.4 million percent return on your time, investment anyway, all right, let's get started with a complete noob category and if you've watched tesla videos before you will know how this one works, the only thing you need to do the maths here Is tesla's annual net profit for last year? This one is great for complete entry level, noob investors who don't want to burden themselves with learning how to read a profit and loss statement.

You just go to google and you type in tesla annual profit, and you get the answer: 721 million dollars. Then you whip out your calculator. You go and you just type in 721, multiplied by 20 because, according to noob investing philosophy, all stocks are just a multiple of last year's profit and the multiple can only be 15 or 20.. It's really simple, so 721 million dollars times 20 is 14.42 billion dollars.

Then you go back to google and you look up tesla number of shares and the answer is 963 million so to get the share price. All you do is divide that answer by 963 and you get the target share price of 14.97 great success. So at this point the noob investor will quickly determine because you don't need to do any more. It's it.

Tesla is a complete overhyped stock. Only idiots will pay 650 for a stock. That is only really worth 15 bucks, but here is why this approach doesn't actually work. Tesla is an example of a hyper growth company being able to value a business in five minutes.

Just by multiplying two numbers together does not make you a financial genius and anyone who tells you that that is the way to do it. I don't think actually really knows how to do due diligence. For me, a really quick back of the envelope calculation to value a company would take at least half a day now. Imagine if i did use this approach to value tesla.

Just one year earlier in february, 2020 tesla's share price was about 150, which is when they released their results for the previous year and their annual profit for the 2019 year was. It was actually a 775 million dollar loss. So, do you multiply that loss by 15 or 20 and get a negative number? Should you have been paid to get tesla shares a year ago, or was the company completely worthless? Was the fair value, zero dollars per share according to this way of thinking, every early stage company that is not yet making revenue or is not yet profitable, is worth nothing and that's a pretty dumb way to think, because some of those early stage companies will be Yielding the best results in the long run because you're getting in relatively early anyway, let's move on to the next level the beginner level. Now the beginner has realized that using a multiple or the pe ratio, which is kind of the same thing, doesn't really work, and they probably also know that the peg ratio won't work either when the company is losing money.

So the beginner will be more sophisticated and value a growth company based on the price to sales ratio. This multiplies the total revenue instead of the profit, and so if a company is losing money but is generating revenue or maybe it's not making a lot of profit, that might seem like a better idea. So tesla earned 31.5 billion dollars in 2020. But what multiple should you use? Well, the way these investors will usually do.

It is go and look at the price to sales ratio of tesla's key competitors, ford made 127 billion in revenue in 2020 and their market cap is 55.6 billion dollars. That's a 0.44 multiple general motors made 122 billion revenue in 2020 and their market cap is 83 billion. That's a ratio of 0.68, so the beginner might conclude. If you're generous and you assume growth for tesla, then maybe tesla can have a ratio of let's say one.

That's more than double forwards ratio. After all, so the company should then be worth 31.5 billion dollars, and that makes the target share price 32.71. So the beginner still looks at tesla and thinks that the company is ridiculously overvalued, although their advanced technique already values tesla. At more than twice what the complete noob tier had right at the beginning now, the problem here is the same as with noobs.

In reality, growth in revenue and growth and profit and growth and free cash flow for early stage. Companies are not linear, they are not linearly dependent and they don't grow. At the same rate, a doubling in revenue will not mean a doubling in net profit. In fact, in q1, 2021 tesla made 438 million dollars in net income on revenues of 10.4 billion dollars, and that is almost double the net profit margin of 2020, just three months after the end of that year.

So next up we have the amateur investor. Amateurs are often beginner investors who have gone and smashed the like button for youtube algorithm and immediately got upgraded by a whole tier. The amateur investor has been around long enough to know that you don't value a growth stock based on a simple multiple, so the amount goes and does a bit of forecasting. They don't go too far, though.

The most typical way here is to forecast the number of cars that tesla will make at some point in the future and use that as a baseline number amateur level by the way is actually good enough to become a permanently featured analyst on cnbc. Yes, so we we have been recommending a short the entire time and many other popular investing gurus, unfortunately fall into this category. So they'll, look at tesla and they'll say well, look tesla made 500 000 cars in 2020 and they'll. Tell you that toyota and volkswagen made eight to nine million cars per year and they are the biggest guys out there and they've been around for 100 years.

So there's obviously no way that tesla can get even close to that number. So what they'll say is they'll say well if everything goes tesla's way, if they do really well, maybe they're going to get to making about 2 million cars per year at some point in the future. Let's say in 10 years time and then they'll usually do the same forward: pe ratio, style calculation so they'll take the 2020 profit of 721 million dollars and multiply it by four to get 2.9 billion dollars. Then, if they're feeling generous they're gon na take that 2.9 billion dollars and multiply it by that same, say, factor of 20 to get a market cap of 58 billion dollars and that makes for a target share price of 60 dollars and 23 cents still ridiculously overvalued.

By a factor of 10, in this scenario, in fact, even if tesla became the biggest car manufacturer in the world and they were making 10 million cars per year, this approach would still only give a target share price of 300 less than half of what it's currently Trading at as i'm recording this video, so according to the amateur investor, sharing their wisdom on cnbc or youtube, tesla is a massive hype stock that is horrifically overvalued from market share to revenues to earnings. This company is really losing the next level up. Is the experienced investor? This will include some professionals and casual investors who decided to up their game. The experienced investor will usually do some kind of a dcf model, a discounted cash flow model.

This is a model that forecasts some key metrics into the future that you can then use to value a company by discounting them to understand what the present value of those metrics is. You can work off ebitda non-gaap income, free cash flow, whatever it is that works for you now, in most of my recent videos, i've actually been using this model to show the outcome just a standard dcf model, because it is simple enough for me to be able To make a youtube video and explain it, because whenever i tried to go a little bit further, nobody really had the interest or attention span to pay attention. Now, if you're valuing a mature company, a dcf model is pretty good. You probably don't need to go much further to get a half decent valuation, but for an early stage company or a hype, but great company.

A dcf model still has some pretty big drawbacks, and here is what one of these models looks. Like you take the 2020 numbers from the company and you assume some kind of growth rate, and you can vary that growth rate, if you feel like keep it flat, it's up to you now. Tesla's revenue is growing at about 45 per year on average over the last five years, so you might go and give them benefit the doubt and put in a fifty percent rate of growth over the next five years. Then you quickly point out that the ebitda in this model in 2026 is 66 billion dollars, which is crazy.

It is more than twice the sum of general motors and four together, which obviously makes it completely impossible. But then you say, but even if even if you assume that 50 rate of growth does hold and they do get to those crazy numbers, you show that the share price should be somewhere between 370 and 920 dollars and because tesla is a fast growing business. You might aim towards the latter and say that the target share price should be somewhere in the 650 to 700 range, which is pretty much exactly where the share price is right now is bang on, but there is no upside. So if you were making a decision based on that, you probably would choose not to invest now.

The problem with dcf models is that they are linear. They assume that the p l and balance sheet items that you have in the model have a linear relationship as a company grows and scales into a mature business, but that is not really how it works. This model doesn't reflect the recent and ongoing capex investments. For example, that materialize into big jumps in revenue that don't account for the fact that proportional profits will look very different in the future to what they look like today, because an early stage company's balance sheet an early stage company's p.

L looks entirely different in terms of ratios now, at the moment, tesla is building two of the biggest factories ever built on the planet that will more than double their production capacity. Just during the first phase of those factories operating, it also doesn't account for non-linear profit growth in relation to revenue. A fast-growing company does not pay dividends, it doesn't stash the cash it reinvest. The money to generate more growth but tesla operates on a gross profit margin of 21.3, with their car business actually running at 25.8.

In the same quarter, ford is running a 13.6 gross margin. We're talking almost two times difference, and this is before any new factories come online. We should actually increase that margin even further for tesla. Now, if you want to take proper account of all of these factors, the right way to do.

It really is to build a bottom up level of some sort. This is the pro level you go out and you model each of the parts of the business individually. You model each of the separate production facilities demand for the different products that the company is going to have you'll build your best estimates of when these different factories are going to have operational production lines and how those may scale, based on information that tesla have already Shared and the history of their existing factories and industry information that you can glean from somewhere else - and this is going to take time and a huge amount of research, which is why most people don't do it. But here is why this approach works.

Really well. Let's say i assume that the berlin factory ends up producing 500 000 cars per year by 2026.. I actually think this is a somewhat conservative estimate. The two factories that tesla already have right now are doing almost that number today at the moment.

But if i assume that 500 000 figure then realistically, i do not see that factory producing less than 250 000, for example, because that would make it perform at half the capacity of the much older and much smaller factories in california and china. But it's also quite unlikely that the factory will be producing over a million cars in a short time after it opens either it's possible. But i'm being conservative in my estimates here. But what i'm trying to say here is this model has an expected variance of roughly two times up and two times down, and i fully expect the number to be pretty close to my estimate in truth, but in a typical dcf model, we're making guesses on a Compounding factor - and that means that if i change that annual growth rate from say 50 to 35 per year, the share price goes down by more than half and increasing that growth rate from 50 to 65 will then push that target share price to more than double And the more you go away, the bigger that difference is going to be, and it's not linear in that relationship because it multiplies it compounds so because the dcf model compounds that growth.

It is pretty sensitive to relatively minor adjustments in some of the factors that you put into the model. Tesla will be announcing. The q2 results in a few days on monday 26th of july, after the us markets close and i'm gon na be refreshing. My tesla evaluation, with the updates and based on the stuff that they're gon na be sharing at some point next week, but i have a feeling that my valuation is going to go up somewhat toward just for these changes.

My target price three months ago was two thousand eight hundred dollars and i had a price of one thousand eight hundred dollars on the car business alone, but with the release of the full self-driving beta a few days ago in the announcement, the tesla are gon na. Be opening up their charging network to all electric vehicles later this year. The game has really moved on. If you found this video useful, please don't forget to smash the like button for the youtube algorithm.

Thank you so much for watching. I really really appreciate it and, as always i'll see you guys later, you.