Tesla’s Valuation: Speculation or Real Growth? My DCF Insights

I did a quick and dirty DCF valuation for TSLA, and here’s what I found. I don’t own TSLA individually; I only have exposure through the S&P. However, with recent events, I’ve been wondering why people hold TSLA.

My typical process when looking into a company starts with a DCF to gauge approximately what the company should currently be valued at. I know, I know, it’s not perfect, but it’s a way to get started.

For TSLA, I averaged the last three years of free cash flow (FCF) at about $5.1 billion. I used a 5% FCF growth rate and a terminal growth rate of 3%, along with a discount rate of 12%. All these estimates are generous for a few reasons: the share count is increasing, FCF has declined over the past three years, and the risk is high.

With these assumptions, I came up with a value of $26.24, which is only 6.85% of the current price. This means that 93% of the value is based on future growth and speculation.

Now, many people assume that Tesla will revolutionize humanoid robots and self-driving cars, so I took a more optimistic approach to the DCF. I used a 20% FCF growth rate and a terminal growth of 7%, which is probably unrealistic. Using the same discount rate, I arrived at a value of $52.62. This represents 13.74% of the current value, meaning 86.26% is based on even more future growth and potential.

With all that said, it’s hard for me to understand what people see in this company. Or am I just thinking the wrong way, and it has nothing to do with making money?

Congrats to all the long-term holders who have made a killing! I’d love to hear your thoughts on this.