I'd appreciate any help (particularly from
@DaveT,
@neroden @TradingInvest etc. ) showing a close friend that staying invested in TSLA for the next ~year is a wise move. Here's our email exchange so far his emails are in blue:
If you are thinking about investing in TSLA this podcast road test is probably worth listening to:
81 – 1,000 Miles with Model 3
I still think for Tesla & electric cars in general the future is bright, but in the next year or two the road will be very bumpy. Tesla's mostly in the news these days b/c of production delays/problems or the fact Elon is off trying to get his 1000 other ideas off the ground. (Tesla had said it would make at least 1,500 model 3 in the quarter that ended Sept. 30. The actual figure was just 260.)
If I were you, I'd be prepared -- stop loss or options to protect your gains. TSLA could easily get hammered in half. I sold half my shares at $330 (via a stoploss) and will rebuy if/when they fall another $50/100.
IMO TSLA is a slam dunk to hit $425-450 by mid 2018. I’d like to hear your reasons for having the opposite opinion, and if you are interested I’d like to explain my reasons to you.
Like I said, I think TSLA's future is bright, but nothing is a slam dunk in investments (or automobile production). Here's why I'm very cautious about TSLA's medium term stock price:
Fundamentally I think Tesla's stock price has gotten ahead of its financial situation. The stock price is as high as it is, not because of their sales or earnings but because they expect to:
1) dominate the electric car market, and
2) make enormous margins on every car they sell.
On the first point: It is possible, but unlikely, they will dominate the electric car market for more than a few years. They are just too many other players with very deep pockets.
On the second point --- they are not making money at all now, so it's complete speculation on TSLA's part that they will have phenomenal margins. (Also Tesla has a long history of overpromising and underdelivering <Can Tesla Inc (TSLA) Stock Survive More Broken Promises?.
The problems with model 3 -- delivering only 15% of what was promised in 2017 -- only add to my skepticism). In any case, it's more likely they will have good margins but not among the best ever seen. Making their stock valuation more in line with other companies, not as a 'special case'.
One final note of caution, Tesla's hemorrhaging cash at an unbelievable rate (a billion dollars every quarter), and they still aren't selling Model 3 (or any cars) in any significant number. There is a small, but non-trivial, chance the company will actually implode or not have the funds necessary for huge growth/R&D to dominate. This adds a non-trivial level of risk.
I thought TSLA was worth a chance at $200, it really hasn't improved it's story since then -- in fact it has failed to deliver what it promised last year. All that, plus the fact the stock is up more than 50% since I originally purchased, makes me think caution is a realistic view.
One last bearish note: the stock market has been in a bull market for 8 years, which is phenomenally long. There's a good chance we'll enter a recession and/or bear market in the next year, especially since we have a nut-job in charge, so the market in general (regardless of what Tesla does) may be going down for a bit and pull TSLA with it.
Finally, a quote from an analyst who's a little bearish on the stock: "Tesla can win as a company — but TSLA can still lose as a stock. At a certain point, even fantastic, transformative, growth is priced in."
Maybe I'm just more cautious and skeptical than you. What are your thoughts on how it's going to be worth $425 in six months?
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The main reason that I believe that the Tesla SP is a slam dunk to be over $425 by next summer is M3 production.
How Many Model 3 Cars Will Tesla Inc Deliver in Q4?
I’m completely confident that by next summer that they will be producing 5k M3's per week with a margin of at least 20%. Historically production with positive margins has moved the Tesla SP. I believe that will have a similar impact to the MS production ramp.
I don’t believe that they need to dominate the entire world vehicle market to justify a substantially higher valuation than GM or Ford and I don’t believe that they need to dominate the entire market for EV’s to be extremely successful in the long run, and certainly not to be successful in the next 6-12 months. That said I believe that a significant number of OEM’s are in an extremely dicey situation, see my comments about the Gigafactory below.
I believe that a more accurate characterization is that Tesla underpromises and overdelivers, but *later* than they hoped.
Their margins are among the highest in the industry. They are *investing* as quickly as they believe is prudent in the Gigafactory, superchargers, stores, service Centers and an automated production line. Its a similar strategy to amazons.
The Gigafactory is huge. How are the other OEM’s going to compete without a supply of batteries? A major reason that Tesla had to build the Gigafactory is that the M3 production requires almost all of the worlds production of lithium ion batteries. The other OEM’s don’t have sufficient demand for their EV’s to commit to a huge scale of battery production without which they can’t produce a large number of EV’s at all, or get batteries at a price that is competitive with Tesla’s prices.
Not improved it’s story? M3 is a great car, the semi and Roadster and the second generation of powerpacks and powerwalls are all disruptive products.
Macro is a risk but with the exception of trump I believe that that’s unlikely to derail Tesla between now and next summer. But that is a risk with options that you would not completely incur with shares.
Playing devils advocate:
Let's assume you are correct and Tesla produces 260,000 M3's next year (ave5k/wk). Let's assume 20% is profit. That means they have ~$1.6 billion in earnings from the M3. They have 168 billion shares outstanding, so that's about 1 penny per share. Completely trivial. That makes their PE in the thousands. Even if they grow by 50%/year (which is their rough revenue growth over the past couple years) they would need over 15 years to grow the earnings to a point where the earnings actually support current prices.
Right now the stock price is based on vision, at a future point it's going to have to be based on earnings. I'm not saying Tesla won't get there, it's just that it's possible a great deal of Tesla's growth is already priced into the stock. It's possible the stock will go sideways for quite some time until the earnings catch up.
BTW, I hope I'm wrong and you make a killing and take me out to lunch with your winnings.
My SP estimate is based as much on past experience as the raw numbers. I believe that there are two reasons for the recent bumps to ~$385. Some of that is based on future expectations but I don’t believe that they need to dominate the entire world vehicle market to justify a substantially higher valuation than GM or Ford.
Those two reasons are the MX being produced successfully and anticipation of the M3 ramp going smoothly. I believe that the big dip is overblown due to memories of the MX problems. The M3 is an entirely different situation and I believe that when it ramps successfully that the price will blow past the previous high (reality is better than anticipation).
I believe that Tesla currently has a problem with producing things that is having a exaggerated impact on their SP. I believe that they are going to turn that into a strength of the company with their “alien dreadnaught production technology” aka Elon’s Production Epiphany.
My math is 35,000 (ave price) x 260,000 (cars) x 20% (profit) =1,600,000,000 total profit for M3. I left out MX, Powerwall, etc, in my example just to show that the big ramp up in M3 in 2018 contributes a trivial amount of earnings (compared to the current stock price). Even if the average price is 45K for the M3, the result is still trivial (one and a half cents per share). Again, my point is not that the M3 isn't a great car, or their production line won't be "best in breed" or anything like that. My point is that at some point, maybe in one year, maybe in 10 years, the stock will be based on real revenue/earnings and not 'vision'. At that point it won't have a PE in the thousands.
They already have a valuation (approximately) equal to GM and Ford. So if the stock is going to continue to grow over the next years, they need to be much, much, much bigger than GM and Ford in sales & profits to justify continued stock growth. That means they need to be the biggest in the world. A niche player cannot justify a high PE unless it's going to grow and dominate.
Again, when it's at $450 in a few months and I'm proven wrong, I look forward to our lunch, and your saying "I told you so."
I'm hoping for a lunch when you are celebrating your SP gain from ~$300 to $400!