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To accommodate those differences, I have set up my valuation spreadsheet to allow for you to replace my assumptions with yours. Not content with creating one set of questionable valuations, both banks doubled down with a number of of other pricing/valuations, including sum-of-the-parts valuations, pricing and transaction premiums, using a “throw everything at the fan and hope something sticks” strategy. While some evade these mistakes by using pricing, there is only one consistent way to get terminal value in a DCF and that is to assume perpetual growth. Both investment banks move back and forth between intrinsic valuation (in their use of cash flows from 2016-2020) and pricing, with Lazard estimating the terminal value of Tesla using a multiple of EBITDA. While there are a multitude of estimation issues that plague perpetual growth based terminal value, from not adjusting the cost of capital to reflect mature company status to not modifying the reinvestment to reflect stable growth, there is one mistake that is deadly, and that is assuming a growth rate that is higher than that of the economy forever. Terminal Value Hijinks: The terminal value is, by far, the biggest single number in a DCF and it is also the number where the most mischief is done in valuation.
Perhaps, Lazard and Evercore need reminders that if the CF in a DCF is supplied to you by someone else, you are not valuing the company, and charging millions for plugging in discount rates into preset spreadsheets is outlandish. The bigger question, though, is why the discount rates don’t change as you move through time to 2021, where both Tesla and Solar City are described as slower growth, money making companies. But on the whole China seems to be a better place and as you know the Chinese unique boutique market is still down 30 or 40% from its all time high. Chinese companies lag the rest of the world, when it comes to EBITDA and operating margins, but do better than other emerging market companies on net margins. My first reaction as I read through the descriptions of how the bankers in this deal (Evercore for Tesla and Lazard for Solar City) valued the two companies was “You must be kidding me!”.