How Much Is Tesla Worth? You Decide

What the electric-vehicle pioneer is worth is one of the hottest questions in the stock market. We know this because the daily trading volume in its shares exceeds that of any other U.S. stock on most days. Disagreements over its price are a big part of what makes buyers and sellers trade.

Tesla has attracted more money from private investors than any other U.S. company on 92% of trading days this year, according to data provider Vanda Research. But it is also the top U.S. short, with roughly $21 billion of capital currently betting that its price will fall, based on data from another provider, S3 Partners.

Tesla’s third-quarter deliveries, which it will report shortly after this weekend’s quarter-end, will likely reignite commentary on its valuation, which has soared this year even as the company reduced prices and Wall Street analysts cut profit forecasts.

While we can’t hope to settle the debate, we can help put to rest one element of it: Tesla is valued as a tech company, not a carmaker.

This might seem obvious given a market value of $859 billion—more than three times as much as that of Toyota, the largest and most valuable member of its automotive peer group. But investors shouldn’t let the familiarity of such comparisons blind them to their strangeness. It is weird that a company that makes money from cars derives much of its value from something else.

How much? A discounted cash flow valuation shows the math. We created a simplified model of Tesla’s finances to calculate a theoretical enterprise value based on different assumptions about the company’s prospects. The implied market value would be this number plus cash on the balance sheet, currently $23 billion in Tesla’s case.

The key variables are: Tesla’s vehicle sales in 2030; the average price it will sell them at in today’s money; the margin it will make on them after head-office and other operating expenses; its cost of capital, or the average rate it needs to pay for funding; and finally the value of new potential automotive businesses such as driverless “robotaxis."

Ignore that last assumption for now. It is possible to get to valuations of $1 trillion and more for Tesla’s core car-making operation by making very aggressive assumptions about both sales and margins, but not realistic ones. As the company’s pursuit of growth through price cuts this year has shown, there is a trade-off between maximizing sales on the one hand and margins on the other.

To put numbers on it: Chief Executive Elon Musk has long talked about making 20 million cars a year by 2030. It is a wildly ambitious goal given that Toyota, the bestselling carmaker today, sold 10.5 million vehicles last year. Ford, an industry pioneer founded 120 years ago, sold 4.2 million. If we bear with Musk, though, it follows that Tesla will become a global mass-market brand with appeal to families in richer and poorer regions alike.

Our best guide to what this company might look like is still probably Toyota, whose consolidated revenue per vehicle was about $28,000 in its most recent financial year through March. If we plug that number into our Tesla model at a generous 10% operating margin—mass-market carmakers typically make single-digit margins—we still only get to an enterprise value of $445 billion for an automotive business producing 20 million vehicles a year in 2030.

Readers of our online editions can play with their own assumptions. One caveat: Discounted cash-flow valuations like this are highly sensitive to the discount rate, which should be the company’s cost of capital. To get to $445 billion, we followed the lead of Aswath Damodaran, professor of corporate finance and valuation at New York University’s Stern School of Business, who in January raised the rate in his more elaborate Tesla model to 10.15% to reflect “a world of higher interest rates and risk premiums." We rounded down to 10% to keep things simple.

If we can only stretch those numbers far enough to justify about half of Tesla’s current valuation based on potential cash flows from car sales, the stock is either hugely overvalued or investors are factoring in cash flows from elsewhere. This is where much of the debate now lies, with bulls identifying potential new profit streams on one side and bears poking holes in them on the other.

For example, Morgan Stanley earlier this month triggered a 10% jump in Tesla’s share price when it moved the stock to the top of its buy list on the basis that the company’s supercomputer, Dojo, could be worth up to $500 billion. The brokerage argued that faster computing would accelerate expected profit from driverless cars, which Tesla is developing with Dojo’s help. Robotaxis are part of the bet, as is recurring revenue from selling automated-driving software. The core car business only accounts for about a quarter of Morgan Stanley’s latest valuation of the company.

Investors can argue over the plausibility of this scenario, which hinges on Tesla cracking the code to automated driving in a way nobody else who is working on the challenge can. Whatever one’s view, it is a lot of value to hang on unproven technologies and ways of making money. As Damodaran points out, future business models will also detract from old ones: If robotaxis can be made to work at scale, vehicle ownership, and hence the growth of Tesla’s current business selling cars to consumers, will take a hit.

As EVs throw the future of mobility wide open, Tesla isn’t the only carmaker working on moonshots. General Motors says it expects to make $50 billion of revenue in 2030 from its Cruise robotaxis that already creep around San Francisco. But investors see that capital-draining business as a cost rather than a potential gold mine. Only Tesla gets the vast valuation benefit of the doubt.

Write to Stephen Wilmot at stephen.wilmot@wsj.com and Peter Santilli at peter.santilli@wsj.com

Methodology:

Our model is based on estimates of Tesla’s future cash flows. It multiplies anticipated vehicle sales in 2030 by the average anticipated price to calculate revenue, and then applies the expected operating margin to arrive at operating profit. Estimates for the years before 2030 assume a smooth path in the variables from this year’s FactSet analyst consensus.

Operating profit is taxed at an 11% rate (FactSet consensus for Tesla in 2023). Cash flows are then calculated as posttax operating profit minus capital expenditures while adding back depreciation and amortization. Capital expenditures are assumed to be a flat 7% of revenue and depreciation and amortization 20% of capital expenditures.

Estimated cash flows through 2030 are discounted back to their present value at the discount rate and aggregated. A terminal value is added to account for Tesla’s cash flows beyond 2030, assuming a steady-state growth rate of 5%. The total of all these discounted estimated cash flows gives the theoretical enterprise value of Tesla’s core automotive business now.

We have left the value of its other businesses as a separate assumption within the model to arrive at a total enterprise value. Market value would also include the company’s cash or debt position, which we have not modeled.