How to square Tesla valuation in 2033?
Tesla has been extremely successful and executed beyond expectations for many years. The high equity valuation implies still high expectations for the future and in order to gauge if they are realistic we will look at what numbers Tesla have to deliver over the next 10 years. Keep in mind that these figures are not exact and are only meant as a mental exercise to understand expectations and the future.
In a steady state a mega cap company in the US equity market would likely be priced at 8% annualized nominal growth rate. If we assume Tesla reaches its steady state in 2033, then we can so reverse engineering of this return expectation. If we assume global inflation will be 3% annualized beyond 2033 and we assume 2% annualized productivity growth then it leaves 3% for dividends and buybacks which in the current market are roughly split as 2% dividend yield and 1% buyback yield. If we assume that Tesla wants financial maneuvering then it will not return all of its free cash flow (cash flow generated from operations minus capital expenditures) to shareholders, then the free cash flow yield in the steady state could be 3.5%.
With the current market value of $830bn that would mean $29bn in free cash flow in 2033. Tesla made $7.6bn in free cash flow in 2022. What would that require in terms of revenue? Volkswagen generates around 3.8% in free cash flow on its revenue and if we assume Tesla can become more efficient, with higher free cash flow generation coming from other businesses including charging network, then it may generate 6% which would then lead to $484bn in revenue in order to generate the $29bn in free cash flow.
Based on expected revenue of $99.9bn in 2023 that would translate into 17.1% annualized revenue growth rate over the next 10 years. How realistic is that? Our main problem is that we have no recent examples of a consumer company selling hardware at these prices globally to a mass market selling a new technology in an existing industry. But we can try to establish a benchmark. In 2011, Apple hit $108bn in revenue and the subsequent 10-year revenue growth rate was 12.9% annualized. This growth rate was obtained by a company with lower priced consumer hardware and selling digital goods on the way, so not completely comparable to Tesla. In addition, Apple was operating in an industry with little meaningful competition.Tesla will experience increased competition over time and while the company is right now looking to become the market leader in the future car industry based on only electric vehicles the revenue expectations are still steep. Based on the numbers we have just presented, and under assumption that markets are rather efficient, then it is clear that the market expects Tesla to generate a free cash flow to revenue margin above 6%. In any case, expectations are very high for Tesla and as an investors we have no good examples in the past to lean on in terms of judging the likelihood of Tesla succeeding in delivering those revenue figures by 2033.