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