Question

What is the Discounted Cash Flow of Tesla, Inc.? (only if dividends – include how determined)

Answer 1

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren’t available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

	2020	2021	2022	2023	2024	2025	2026	2027	2028	2029
Levered FCF ($, Millions)	US$678.0m	US$2.22b	US$4.17b	US$4.93b	US$5.93b	US$6.65b	US$7.26b	US$7.76b	US$8.18b	US$8.53b
Growth Rate Estimate Source	Analyst x11	Analyst x13	Analyst x7	Analyst x4	Analyst x3	Est @ 12.29%	Est @ 9.12%	Est @ 6.91%	Est @ 5.36%	Est @ 4.27%
Present Value ($, Millions) Discounted @ 6.1%	US$639	US$2.0k	US$3.5k	US$3.9k	US$4.4k	US$4.7k	US$4.8k	US$4.8k	US$4.8k	US$4.7k

(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$38b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 10-year government bond rate of 1.7%. We discount the terminal cash flows to today’s value at a cost of equity of 6.1%.

Terminal Value (TV)= FCF₂₀₂₉ × (1 + g) ÷ (r – g) = US$8.5b× (1 + 1.7%) ÷ 6.1%– 1.7%) = US$199b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$199b÷ ( 1 + 6.1%)¹⁰= US$110b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$149b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$454, the company appears quite undervalued at a 44% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.