NYU’s Aswath Damodaran isn’t exactly a household name, but he’s made some of the best stock valuation calls around in recent years—calling the Apple peak and the Facebook low. He’s out with some new math today on Tesla concluding that the company is optimistically worth about 40 percent of its current market price.
It’s worth running through his calculation yourself since it’s a great pedagogical exercise in fundamentals-based stock analysis. My comment is this, though. Damodaran is deliberately sketching out what he deems to be an optimistic scenario in which “Tesla will grow to be as large as Audi, while delivering operating margins closer to Porsche’s.” Which is to say he’s assuming that Tesla will go from its current status as a niche luxury car maker to reach the size and scale of a large luxury car maker.
For my part, rather than ask whether stocks are overpriced or underpriced I prefer to look through the other end of the telescope. What does Tesla’s high market price imply about the company? And by Damodaran’s math, what it implies is that stock buyers expect it to grow much larger than Audi to the scale of Ford or Daimler. At the size of those companies, Tesla is fairly priced.
Now does that make any sense? Don’t ask me. But it is worth noting that Elon Musk and his team have always articulated the aspiration to become a mass market car manufacturer. The car they are currently selling is a luxury car, but the theory of the case is that this car will generate the brand value, R&D revenue, and charging infrastructure necessary to roll out a mass market car 3-4 years down the road. Will that really happen? Again, don’t ask me. But what Tesla’s share price is saying is that there are a critical mass of investors who believe that theory.