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Tesla Motors, Inc. Message Board

  • alangreenspam alangreenspam Jul 3, 2013 11:22 AM Flag

    Motley fool nails Jeffries for it's Price target based on a 10-YEAR DCF!!!

    Jeffries is as dishonest as they come...

    ....Problem 3: Overly optimistic growth rate

    Now let's turn to Tesla. Is it possible to justify Tesla's crazy-high P/E ratio by tweaking parameters in a DCF calculation? Well, that's likely what analysts with their price targets do every day. Tesla recently had its first quarter of profitability after burning through cash for many years. The company is valued at $12.5 billion.

    Let's say that next year Tesla manages $50 million in profit. For the next 20 years the company grows at a high rate and then by 5% annually after that. Using a discount rate of 7% this high growth rate needs to be about 18% to fairly value the stock at the current market price.

    I don't know how fast Tesla will grow 12 years from now. No one does. In order to justify the current valuation you have to make some pretty bold assumptions. And because the calculation is so sensitive to those assumptions the answer has little meaning at all. If the growth rate is dropped to 15% instead of 18% the value of the company falls by nearly 40%. If you're wrong by 3% the company goes from being fairly valued to being outrageously overvalued.

    The fact that you can tweak the parameters slightly and obtain a completely different result should tell you that the result doesn't carry much meaning. When an analyst comes out with a price target this is exactly what they do. They tweak things until the answer comes out "right".

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