EV/EBITDA - A Tesla Valuation Case Study - How to Value an Unprofitable Stock

hi I'm Jimmy in this video we're gonna look at how we can value a company that isn't profitable we're gonna use Tesla as our case study even though Tesla has been profitable for the past couple quarters either way the concept still works so we're gonna be using a method called enterprise value to EBITDA now this is not intended to be an analysis of Tesla as a company or as a business it's really about how we can use enterprise value to EBITDA as a way to value a company like Tesla or even a company like beyond meat which also hasn't been profitable although it looks like they might be making a turn soon okay so let's dive in and what enterprise value to EBITDA is and how it could be used first is enterprise value often we can shorten that to EV so you might hear that's called EV to EBITDA then EBITDA is short for earnings before interest taxes depreciation and amortization now let's look at how we can calculate this and how we can use it to properly buy a company like Tesla at a decent price and then we'll see if we can apply it to Tesla's stock and hopefully see if we can come up with where it could be a good value okay so what is enterprise value well enterprise value is essentially the current value of the operations of the business and if we if we think about it it this is both logical and very important for us to realize we're trying to value the operations so over the past 12 months Tesla isn't profitable so something like a price to earnings and multiple doesn't work since their earnings number would be negative but certainly that doesn't mean that Tesla isn't worth anything so what if we could find something to value the operations of Tesla well that's essentially what enterprise value does and to calculate enterprise value here's what we do first we add the market value of the common stock then we would also add any preferred shares although preferred shares aren't nearly as popular as common shares well once we have the market value of the common shares we add the market value of the debt next we add what's known as minority interest and then finally we subtract cash and any short term investments now at first glance this might seem a bit counterintuitive why are we subtracting cash and why are we adding debt but hopefully this all makes sense as we walk through this so first let's start with our first piece we want to add the market value of common and preferred shares so as far as common stock is concerned what does the market value well this is fairly easy to get it's simply the market cap of the company what is the market capitalization how much is the entire company worth so we first the first numbers essentially we take the market cap of the stock out there okay so that's simple enough now the next one probably trips up some people I know it took me up when I first first started learning about EV to EBITDA so next we are adding the market value of the debt now this might seem at least a bit it might not seem obvious as to why we're doing it why are we adding dead isn't debt a bad thing and how does this add to the operational value of the business well here's how I visualize it and hopefully this helps other people sort of see the concept option two is we could always just memorize the formula if we want either way would work but for me I find it much easy to accept if I understand why we're doing something okay so let's pretend that you and I were to go out and start a business and when we go on to start a business we go on we've raised some money now we decide to sell five million dollars worth of stock in our company to the public or to whomever it is and then we decide to borrow five million dollars more by issuing some bonds well assuming that we take that cash and immediately start building out our operations well what's the hypothetical value of our operations at that point well we can't say it's just the equity contributing to the overall value of the operations heck that's only accounts for half of the money we have right or half of the operations that we've set up so in theory this business the operations of this business would be worth 10 million dollars since ten million dollars would have been invested in those operations so that's why we add debt because debt adds in theory to the operational value of the business but to make things even more confusing now we go ahead and we subtract cash why isn't cash a good thing well it is sort of but is it really so with our same example fifty percent stock and fifty percent debt but let's roll this back for a second and pretend that when you and I started the business we went out we sold the same five million dollars worth of stock same five million dollars worth of debt but this time we hold on to the cash that we raised and we don't go ahead and set up the operations just yet so right now we're sitting on ten million dollars in cash so let's ask a question what is the business worth well our first answer might be while it's worth ten million dollars a ten million dollar sitting in cash that's true but what if we were trying to value the operations of the business well we didn't set up the operations yet okay so the operations or better known as the enterprise value of the business is zero we have five million in stock plus five million in debt minus the cash we have and boom we're down to an operational value of zero now of course I'm oversimplifying this in the example but I just want us to logic out why each piece of the formula exists okay now the final piece is minority interest so minority interest is the percentage of a subsidiary that a that the company doesn't own so tesla calls this non-controlling interest you might hear it called minority interest might hear it called non-controlling interest either way it's the same thing but basically here's how this works imagine Tesla goes out and buys a company but they don't buy the whole thing that by 80% of another company well by rule because they have controlling interest in that company well Tesla is required to account for the entire company in their financial statements so this is Tesla's income statement for 2019 or you know rough version of and basically well let's say they had twenty four and a half billion dollars in revenue well what if Tesla generated twenty three and a half billion dollars in revenue and the subsidiary that they owned generated the other billion while on this financial statement tesla lists the entire billion dollars that gives them their consolidated revenue even though they only eighty percent they only own 80% of that other company gross profit same thing how much did ga Tesla generate in gross profit well add that to their subsidiary one hundred percent of it gets pushed together and it keeps going right on down the line until we get to net income for 2019 which was about is seven hundred and seventy five million dollar loss but now Tesla goes ahead and say wait a second we don't own a hundred percent of that company well now they account for the fact that they only own eighty percent the other twenty percent in this case accounted for about seven eighty seven million dollars in profits so Tesla takes that subtracts the 87 million that wasn't theirs and that's how you end up with the actual gap profit of an eight hundred and sixty two million dollar loss okay now this brings us to the valuation part of Tesla and if the minority interest thing is is still a bit confusing hopefully we'll clear that up in a moment okay so we know what we know we're trying to use enterprise value to EBITDA to value Tesla stock okay so we know the formula for enterprise value we just ran through that and I did the math there enterprise value right now it's about a hundred and forty eight billion dollars now we need EBITDA luckily this formula is a bit easier since EBITDA is short for earnings before interest taxes depreciation and amortisation so I did the math for that as well and actually made an adjustment because Tesla had a one-time charge or a one-time restructuring Church so I added that to EBIT EBIT is right here on the income statement so going back to the minority interest we know that for a bit on the financial statement that is accounting for a hundred percent of that minority interest a hundred percent of the city that is owned minority interest isn't taken out getting you to get down here so since we're using EBIT and then we're gonna add depreciation in the amortization you have to account you have to add back the minority interest since that's 100 percent enterprise value assumes 100 percent so that's why you're adding it back so when we do the math we've got an EBITDA value for Tesla of about 2.2 billion dollars now this works just like a p/e multiple would we take the enterprise value we divide that by EBITDA and we get an EV to EBITDA multiple for Tesla stock of about 66 X and that's based off of the current market cap now the question is what should it be well this is a long-standing debate for nearly every company we can look at their own history we can look at other companies other competitors we can look at the market overall and try to gauge where it might be so at the end of 2019 they had an EV to EBITDA multiple of about 38 x that's using the market cap from the end of 2019 in the previous 12 months at the end of 2018 they had a multiple of 37 X now if we compare Tesla stock to other car companies well Tesla may seem way overpriced since Ford has an EV to EBITDA multiple of about 2x if we go with a slightly more expensive car a BMW has an EV to EBITDA multiple of 7 X now I saw a bunch of comments saying well Tesla is a technology company it's not really a car company so Ford and BMW are bad comparisons and maybe that's true I also heard them say I also saw different comments saying it would be closer to a company like Apple or Google or Facebook because these companies are more software driven more technology driven ok so if that's what we want to compare it to well Apple is trading at about 17 X Google's sitting at 20 X and Facebook is sitting at about 18 X so even if we took the high end of those comparison points that's 20 X which implies that Tesla is more than triple overvalued from where it should be if we would think it's a comparable company to Google so the question is where do investors should we buy it at this level clearly my in my opinion is no I don't think we should I think it makes sense for to wait for the stock to pull back or for profits to catch up because multiple this high seems very unsustainable so this might raise the question when do we buy a stock like this and when do we buy any stock for that matter well I actually did a video on when to buy a stock that could be a good next video for you to watch I focused more on identifying the fair value of the company and then looking and then assigning an appropriate margin of safety to our valuation trying to buy it at that point or below so if you're curious that could be a good next video to watch there's a link here and there's a link in the description below and I really want to thank you for stick with me all the way into the video I really appreciate it thanks i'll see in the next video

Channel: Learn to Invest - Investors Grow

Views: 55,240

Keywords: Investment Ideas, learn to invest, investing for beginners, stock market, Enterprise value, enterprise value to ebitda, enterprise value to ebitda multiple, ev/ebitda, ev/ebitda valuation, why subtract cash from enterprise value, why add debt in enterprise value, how to calculate enterprise value, TSLA, how to value unprofitable stocks, best way to value unprofitable stocks, how to value tesla stock, best way to use Enterprise value, tesla stock analysis

Id: uTNZiFgUa_Q

Length: 10min 44sec (644 seconds)

Published: Tue Feb 11 2020