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