DCF & Implied FCFF Growth Rate For Tesla

Forward

Discounted cash flow (DCF) analysis is one of the most common valuation methods for a stock.

The overarching idea is that "The value of a stock is the present value of its future cash flows".

In this exercise, I first start by doing a typical DCF analysis of Tesla, using free cash flow to the firm (FCFF) as the cash flow metric of choice.

Next, given that the FCFF growth rate is a key variable driving the DCF valuation, I will use Excel's data analysis feature to figure out, based on Tesla's current market price, what is the implied FCFF growth rate.

Finally, I graph the relationship between Tesla's stock price, and the implied FCFF growth rate.

My Process

1: Financial Statements

I obtain the data for the 3 key financial statements:

Balance sheet
Income statement
Cash flow statement

From Morningstar, which at the time of writing has the option to download the financial statements into Excel.

Notably, I felt that Tesla's tax expense was not consistent enough to calculate a tax rate, so I settled for industry-average tax rate in my calculations below.

2: Discount Rate

Since I am using FCFF, my discount rate is the weighted average cost of capital (WACC).

I hence start by calculating Tesla's cost of equity, using the formula

Rs = Rf + (Rm-RF) ×β

Using market values of equity and debt, the company's funding is heavily skewed towards equity due to the high market value of equity.

Consequently, the WACC calculated was 15.44%

3: Forecasting FCFF Growth

Assuming a 10-year period of FCFF growth, I have to decide on a growth rate.

I chose (ROIC x Reinvestment rate) as the growth rate.

Tesla's ROIC was around 16.8% and its reinvestment rate was taken to be 100%, which it has exhibited in past years.

Hence the FCFF growth rate is assumed to be 16.8% annually over the next 10 years.

4: Terminal Value

I am using the perpetuity growth model for the terminal value (as opposed to an exit multiple or liquidation value)

Past the 10-year mark into the future, I assumed that Tesla's FCFF grows at a rate of 2.5% annually in perpetuity.

I used the WACC from earlier of 15.44%, though in hindsight it could be lower for this context when considering perpetual growth of a mature firm.

The FCFF is the FCFF from the 10th year into the future (2033).

Credit: Finance Strategists

5: DCF Process

Here, I carry out the typical DCF calculations.

Discounting of FCFF gives me Tesla's fair enterprise value.

Which is then converted to Fair market cap of $222 billion...

And finally, to a fair value of $69 price per share. This is significantly lower than the current market price, which imply that my model's estimate of their future growth is lower than what the market is expecting

6: Implied FCF Growth Rate

With the basic DCF model complete, I next use Excel's "what if" data analysis feature to generate a data table for

FCFF growth rate
Price

To visualize the relationship between these 2 variables.

Based on $TSLA's market price at the time, it implied an FCFF growth rate of 22.5%.

7: Visualizing The Relationship

By graphing the data table earlier, we are able to visualize the relationship between

Tesla's stock price,
And the implied FCFF growth rate

Thus, we can simply refer to the graph to find, for any given TSLA market price, the implied FCFF growth rate.

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