Articles/megaposts by DaveT

[DaveT]

I understand your analysis, but I believe you are overlooking one key factor on how WS assigns value, and that is growth. If TA grows from $8B in 2016 to $47.2B in 2020 that is a 56% CAGR. The 5 year CAGR for the auto industry is 10.9%. (F: Ford Motor Co Top Competitors and Peers). That means Tesla would be growing revenue 5 times faster than the industry. The industry P/E is 8.5. WS does not assign the same P/E to a company growing at 55% that it does to one growing at 11%. So your 2020 valuation of TA is likely off by a factor of 2 or more, which would imply a valuation of at least $100B.

Look at Amazon. They are similar to Tesla in that they are using technology to disrupt very large low margin businesses. There net margin is only 2.5%. But their current P/E is 173, and that is at the low end of their historical P/E valuation. (Amazon.com PE Ratio (TTM) (AMZN)) They are also valued at 3.3 times sales, while the auto industry P/S is .5. I'm not saying that we can expect for Tesla in 2020 to have the same multiples as Amazon. But clearly with a big success for the Model 3 and 56% CAGR Tesla won't be valued the same as the legacy auto industry either.

@dennis It's tough to predict the multiple that investors will give to TSLA in 2020. But if the auto industry was a growing market, then I would agree that TSLA deserves a higher than 10 P/E multiple due to their high growth rate. But if the auto industry is shrinking and will shrink further, then in 2020 I'm expecting the sentiment around investing in the auto industry to be very, very bearish. I think the multiple investors give to auto makers will be much lower than they are now... especially once we see more evidence of the market shrinking (which I'm expecting) and some auto makers start to show financial stress (ie., beginnings of a bankruptcy slope). In other words, the whole industry will be hurting. And this will affect how investors view Tesla's auto making business, which is the part of the business that I'm isolating for valuation purposes in this exercise. So, if the auto market was healthy and growing in 2020, then I could see TSLA fetching a 15-20 P/E multiple for their auto making business. But if the auto market is shrinking and showing stress in 2020 (like I'm expecting), then I can see investors give a 10 P/E for their auto making business.

Of course, Tesla can compensate for a shrinking auto making industry by going heavy into the transportation as a service industry, which we've discussed at great length in this thread. This to me is where the money will be. In other words, limited profit/money in the auto making business, but more money in the transportation as service industry. If they can be successful in the transportation as a service industry, TSLA will receive a very high P/E multiple from investors, because it's a growing market.

Regarding the Amazon analogy, I understand what you're trying to get at... high growth and big market leads to high multiples for a company like Amazon. However, Amazon's situation and P/E is unique and complicated. Basically, it's not very helpful to look at their official P/E, but rather look at their P/E if they stopped investing and spending on growth. In that case, their profits would be much higher and their P/E would be more in line with other growing companies.

Also, on another note, when I say a 10 P/E multiple for TSLA in 2020 (or a 15-20 P/E multiple), I'm not referring to their actual official P/E multiple at that time. At that time, their actual P/E will likely be 100-200 P/E because they will likely be investing heavily into growth and will be foregoing profits as a result. So, yes if you look at actual P/E it will be a very high number, but that number is useless to me because it doesn't show much. To make that number useful, one needs to see Tesla's numbers in 2020 and suppose that they stop investing in growth and take that profit and use that profit number to come up with a P/E number. That's where I'm getting the 10 P/E number... it's more a 10 multiple of the price/"potential" earnings.

But again, the actual P/E will be much, much higher due to profits being quite low due to investment spending. And Tesla will likely be growing in very highly lucrative markets, like the ones I mentioned I'm excited about - transportation as a service and energy. The growth in those markets will fuel a higher P/E multiple from investors due to their growth prospects. But I'm just saying, regarding auto manufacturing ... it's not a very sexy industry, especially with the potential of the market shrinking, and thus this affects Tesla's valuation in terms of auto manufacturing.

There are caveats to this, of course. It's possible that autonomous driving provides a windfall of extra gross margin and profit, and propels Tesla to have gross margins on Model 3 higher than 25%, which would change my calculations. Also Tesla's growth projections could change as well.

But overall, as a TSLA investor I think the stock is fairly priced if one sees TSLA only as an auto maker, headed to 1 million cars in 2020. I think a current price range of $180-$260 is fair, considering there's significant risks ahead and likely dilution as well. And if Tesla, hypothetically, fails in all their other businesses (energy, ride sharing, semi, etc) then I wouldn't be surprised to see TSLA at $200-300/share in 2020 even with 1 million cars delivered in that year.

So, when skeptics of TSLA say that 1 million cars in 2020 is priced into TSLA, I don't necessarily disagree with them. Largely due to the diminishing prospects of the auto manufacturing industry as a whole in 2020, which will affect sentiment around Tesla's auto manufacturing business and the risks ahead for Tesla which need to be factored into Tesla's current stock price. But that's not why I'm a TSLA investor. I don't think the following have been priced in AT ALL into TSLA's stock price:
1. Tesla Network (transportation as a service for people)
2. Tesla Semi (transportation as a service for goods)
3. Tesla Energy

However, it's tricky for analysts, skeptics, and the public to attribute a lot of current value to TSLA for these future lines of businesses, because in a lot of ways it's placing a lot of faith in Tesla and Elon Musk to expand their business way beyond their current main line of business.

I think of the three lines of businesses I mentioned, Tesla Energy has the most to surprise people in the next 1-2 years... however this impact might be sedated by the complexities and costs of integrated SolarCity.

Tesla Network and Tesla Semi are still a ways out, especially for Tesla to accrue significant revenue from which would change TSLA's trajectory as a stock.

 

[wdolson]

The reason Trump ran for president was explained in one sentence by his campaign slogan. He's had that message from day one. It's printed on every hat. That's his premise.

The realization of that premise will take many forms. He's highlighted a number of areas of importance including
- Renegotiating bad trade deals
- Stopping illegal immigration

There are a few issues with illegal immigration that sloganeers like Trump can't seem to get their mind around. First off the illegal immigrant population in the US stabilized and has not changed during Obama's presidency and around 66% of illegal immigrants in this country have been here more than 10 years.
5 facts about illegal immigration in the U.S.

Illegal immigrants are much less likely to commit crimes here than people born here. Why? They don't want to get deported.
The Mythical Connection Between Immigrants and Crime

And the only reason the illegal immigrants come here in the first place is there are jobs native born people won't do. If you could get unemployed native born Americans to pick crops and do the other scut work illegals are willing to do, the illegals would leave the country because they wouldn't be able to make any money.

Trump's solution is to build a wall, but where there is a wall on the border, it's ineffective. People either just make taller ladders, or the dig under the fence.

Another thing, not all illegals comes across the southern border. In the NE US there are a fair number of illegal alien Irish immigrants. And about 1.2 million of the 11 million in the US are from Asia. Most were smuggled in containers on ships.

In recent years the illegals that have been coming to the US are from other countries than Mexico. A number are passing through Mexico from further south, but Mexicans are less likely to immigrate because the economy in Mexico has improved to such a degree that people don't feel the need to try and make a living in the US illegally anymore. The reasons for the economic improvement in Mexico are a mix of US factory jobs moving there because of NAFTA and the illegal drug trade has pumped a lot of money into Mexico's economy which has helped a middle class to grow and prosper.

- Fixing health care

Post #111 in this thread:
Which candidate is better for Tesla?

Obamacare cost are going up because of a poison pill amendment from Marco Rubio. Obamacare is very fixable if Congress was just willing to do their jobs. Maybe if Trump renames is Trumpcare he will be able to get the Republicans to make the necessary fixes. Who knows. In any case the core of the problem is political, not structural.

- Achieving energy independence.

Trump owns a fair bit of oil company stocks and I haven't heard he owns any stocks in any renewable energy businesses. One of the companies he's invested in is the company building the Dakota Access pipeline.
In Case You Were Wondering, Donald Trump Has Multiple Ties to the Dakota Access Pipeline
Here Are Donald Trump's Biggest Stock Holdings

Drill baby drill.

- Preventing the over-regulation of business

ie he wants to be able to do whatever he wants free of anything getting in the way like pesky laws to protect people from predatory business practices. He has a history of being sued and investigated for shady business practices.

Personally I think the whole issue of regulation of business is a complex one and everything needs to be dealt with on a case by case basis, but on the whole, businesses are under regulated in this country. Disasters like the Deepwater Horizon happened because of under regulation.

- Bringing manufacturing jobs back to the U.S.

For businesses like auto manufacturing, it's cheaper to do final assembly of cars near where they're sold. That's why most of the major car companies have factories on every continent. However, for most other products, it's much cheaper to make them in some country with cheaper labor costs and lower regard for worker safety and ship them where needed. Unless the US wants to go back to paying workers $0.50 an hour with 80 hour work weeks and eliminate all OSHA regulations, that isn't going to happen.

Technology is making it possible to bring some manufacturing back to the US but it means very heavily automated factories and very few jobs for unskilled workers. What workers there are in these factories will be skilled labor who have at least a 2 year college degree if not an engineering degree and there will be only a few compared to a traditional factory.

The economics of the world today means very little low skill factory work in a developed country. This isn't just in the US, it's true of most developed countries. The people who promise otherwise are deluded or lying. Since Trump has imported almost everything he has sold through his businesses the last couple of decades, I think the latter is more likely with him.

At his core, he's a negotiator. He wrote a book about it. He doesn't tip his hand about future plans, and his initial position is beyond where he expects to succeed. That way he has room to negotiate back to what he really wants.

IMO, at his core Trump is a con man, and someone already pointed out Tony Schwartz wrote the Art of the Deal. I'm not sure Trump has even read it.

Pertinent to Tesla, the core of his economic message is to bring manufacturing jobs back to the United States. Unlike every recent president, he's not a free trader. He's a fair trader. Through the course of the campaign he repeatedly mentioned China's import taxes. Musk has mentioned them as well. It's one of the reasons that American car companies fare poorly in China and why Tesla's future Asia factory will need to be built there as well.

And, ultimately, having been both a Democrat and Republican, I suspect he's, on some level, a pragmatist

As I pointed out above, heavy manufacturing like the automotive industry is one of the few manufacturing industries where it makes sense to do most of it in the same continent where the vehicles are sold. Most cars sold in the US today are assembled in factories in North America, quite a few of those in American factories. Here is a list of cars built in the US:
List of automobiles manufactured in the United States - Wikipedia
List of automotive assembly plants in the United States - Wikipedia

I note Tesla was left off the first list.

Components for those cars come from all over the world, but it makes economic sense for final assembly to be done on the same continent. The economics is different for other manufactured goods.

 

[aubreymcfato]

I note Tesla was left off the first list.

I added it.

 

[AudubonB]

Mod Note:

(not specifically directed toward any recent post; rather, this note is going to ALL active Investor threads).

LAST day of tolerance toward posts that otherwise would have been, and are, unacceptable. One week of election-related wailing and gnashing of teeth and blaming it on others and overall unproductive posts is enough.

 

[viKtor slamet]

@dennis It's tough to predict the multiple that investors will give to TSLA in 2020. But if the auto industry was a growing market, then I would agree that TSLA deserves a higher than 10 P/E multiple due to their high growth rate. But if the auto industry is shrinking and will shrink further, then in 2020 I'm expecting the sentiment around investing in the auto industry to be very, very bearish. I think the multiple investors give to auto makers will be much lower than they are now... especially once we see more evidence of the market shrinking (which I'm expecting) and some auto makers start to show financial stress (ie., beginnings of a bankruptcy slope). In other words, the whole industry will be hurting. And this will affect how investors view Tesla's auto making business, which is the part of the business that I'm isolating for valuation purposes in this exercise. So, if the auto market was healthy and growing in 2020, then I could see TSLA fetching a 15-20 P/E multiple for their auto making business. But if the auto market is shrinking and showing stress in 2020 (like I'm expecting), then I can see investors give a 10 P/E for their auto making business.

Of course, Tesla can compensate for a shrinking auto making industry by going heavy into the transportation as a service industry, which we've discussed at great length in this thread. This to me is where the money will be. In other words, limited profit/money in the auto making business, but more money in the transportation as service industry. If they can be successful in the transportation as a service industry, TSLA will receive a very high P/E multiple from investors, because it's a growing market.

Regarding the Amazon analogy, I understand what you're trying to get at... high growth and big market leads to high multiples for a company like Amazon. However, Amazon's situation and P/E is unique and complicated. Basically, it's not very helpful to look at their official P/E, but rather look at their P/E if they stopped investing and spending on growth. In that case, their profits would be much higher and their P/E would be more in line with other growing companies.

Also, on another note, when I say a 10 P/E multiple for TSLA in 2020 (or a 15-20 P/E multiple), I'm not referring to their actual official P/E multiple at that time. At that time, their actual P/E will likely be 100-200 P/E because they will likely be investing heavily into growth and will be foregoing profits as a result. So, yes if you look at actual P/E it will be a very high number, but that number is useless to me because it doesn't show much. To make that number useful, one needs to see Tesla's numbers in 2020 and suppose that they stop investing in growth and take that profit and use that profit number to come up with a P/E number. That's where I'm getting the 10 P/E number... it's more a 10 multiple of the price/"potential" earnings.

But again, the actual P/E will be much, much higher due to profits being quite low due to investment spending. And Tesla will likely be growing in very highly lucrative markets, like the ones I mentioned I'm excited about - transportation as a service and energy. The growth in those markets will fuel a higher P/E multiple from investors due to their growth prospects. But I'm just saying, regarding auto manufacturing ... it's not a very sexy industry, especially with the potential of the market shrinking, and thus this affects Tesla's valuation in terms of auto manufacturing.

There are caveats to this, of course. It's possible that autonomous driving provides a windfall of extra gross margin and profit, and propels Tesla to have gross margins on Model 3 higher than 25%, which would change my calculations. Also Tesla's growth projections could change as well.

But overall, as a TSLA investor I think the stock is fairly priced if one sees TSLA only as an auto maker, headed to 1 million cars in 2020. I think a current price range of $180-$260 is fair, considering there's significant risks ahead and likely dilution as well. And if Tesla, hypothetically, fails in all their other businesses (energy, ride sharing, semi, etc) then I wouldn't be surprised to see TSLA at $200-300/share in 2020 even with 1 million cars delivered in that year.

So, when skeptics of TSLA say that 1 million cars in 2020 is priced into TSLA, I don't necessarily disagree with them. Largely due to the diminishing prospects of the auto manufacturing industry as a whole in 2020, which will affect sentiment around Tesla's auto manufacturing business and the risks ahead for Tesla which need to be factored into Tesla's current stock price. But that's not why I'm a TSLA investor. I don't think the following have been priced in AT ALL into TSLA's stock price:
1. Tesla Network (transportation as a service for people)
2. Tesla Semi (transportation as a service for goods)
3. Tesla Energy

However, it's tricky for analysts, skeptics, and the public to attribute a lot of current value to TSLA for these future lines of businesses, because in a lot of ways it's placing a lot of faith in Tesla and Elon Musk to expand their business way beyond their current main line of business.

I think of the three lines of businesses I mentioned, Tesla Energy has the most to surprise people in the next 1-2 years... however this impact might be sedated by the complexities and costs of integrated SolarCity.

Tesla Network and Tesla Semi are still a ways out, especially for Tesla to accrue significant revenue from which would change TSLA's trajectory as a stock.

Thanks for the insights DaveT. I think Tesla could change the automobile industry perception by doing "machine that makes the machine" Aliendreadnaught program. IIRC, the program basically increase the fixed cost ROI on factory and equipment, which could increase Gross Margin. Also, Tesla should charge more on S/X and try to hit their target of 35% GM. Tesla could change the perception that automobile manufacturing industry is razor-thin margin business by doing that and hitting 35-40% Gross Margin on S/X. They currently sort of have the monopoly in the high performance sedan and SUV, mainly the P100D. The fastest car, longest range, etc2.

Apple iPhone is an outliar with 60% Gross Margin even with seas of competition from Android. iPhone enjoys 103% profit share because they have the best product and monopoly in the high end phones. All other Android are having a price war and losing money.

Tesla should do the same as Apple iPhone if they are confident that they have the best high performance EV. Keep the base price the same, and high-optioned one more expensive. Tesla would be silly if they cannot hit 35%-40% Gross Margin on S/X.

 

[AudubonB]

***MOD NOTE***

Okay, fun time is over. I hope all were able to let off all the steam needed, because from now on we will have only decorum, and that of the highest order.

Besides, these Mod Notes are suffering from a bit of overuse.

 

[dennis]

I

@dennis
Of course, Tesla can compensate for a shrinking auto making industry by going heavy into the transportation as a service industry, which we've discussed at great length in this thread. This to me is where the money will be. In other words, limited profit/money in the auto making business, but more money in the transportation as service industry. If they can be successful in the transportation as a service industry, TSLA will receive a very high P/E multiple from investors, because it's a growing market.

Regarding the Amazon analogy, I understand what you're trying to get at... high growth and big market leads to high multiples for a company like Amazon. However, Amazon's situation and P/E is unique and complicated. Basically, it's not very helpful to look at their official P/E, but rather look at their P/E if they stopped investing and spending on growth. In that case, their profits would be much higher and their P/E would be more in line with other growing companies.

Also, on another note, when I say a 10 P/E multiple for TSLA in 2020 (or a 15-20 P/E multiple), I'm not referring to their actual official P/E multiple at that time. At that time, their actual P/E will likely be 100-200 P/E because they will likely be investing heavily into growth and will be foregoing profits as a result. So, yes if you look at actual P/E it will be a very high number, but that number is useless to me because it doesn't show much. To make that number useful, one needs to see Tesla's numbers in 2020 and suppose that they stop investing in growth and take that profit and use that profit number to come up with a P/E number. That's where I'm getting the 10 P/E number... it's more a 10 multiple of the price/"potential" earnings.

But again, the actual P/E will be much, much higher due to profits being quite low due to investment spending. And Tesla will likely be growing in very highly lucrative markets, like the ones I mentioned I'm excited about - transportation as a service and energy. The growth in those markets will fuel a higher P/E multiple from investors due to their growth prospects. But I'm just saying, regarding auto manufacturing ... it's not a very sexy industry, especially with the potential of the market shrinking, and thus this affects Tesla's valuation in terms of auto manufacturing.

There are caveats to this, of course. It's possible that autonomous driving provides a windfall of extra gross margin and profit, and propels Tesla to have gross margins on Model 3 higher than 25%, which would change my calculations. Also Tesla's growth projections could change as well.

But overall, as a TSLA investor I think the stock is fairly priced if one sees TSLA only as an auto maker, headed to 1 million cars in 2020. I think a current price range of $180-$260 is fair, considering there's significant risks ahead and likely dilution as well. And if Tesla, hypothetically, fails in all their other businesses (energy, ride sharing, semi, etc) then I wouldn't be surprised to see TSLA at $200-300/share in 2020 even with 1 million cars delivered in that year.

So, when skeptics of TSLA say that 1 million cars in 2020 is priced into TSLA, I don't necessarily disagree with them. Largely due to the diminishing prospects of the auto manufacturing industry as a whole in 2020, which will affect sentiment around Tesla's auto manufacturing business and the risks ahead for Tesla which need to be factored into Tesla's current stock price. But that's not why I'm a TSLA investor. I don't think the following have been priced in AT ALL into TSLA's stock price:
1. Tesla Network (transportation as a service for people)
2. Tesla Semi (transportation as a service for goods)
3. Tesla Energy

However, it's tricky for analysts, skeptics, and the public to attribute a lot of current value to TSLA for these future lines of businesses, because in a lot of ways it's placing a lot of faith in Tesla and Elon Musk to expand their business way beyond their current main line of business.

I think of the three lines of businesses I mentioned, Tesla Energy has the most to surprise people in the next 1-2 years... however this impact might be sedated by the complexities and costs of integrated SolarCity.

Tesla Network and Tesla Semi are still a ways out, especially for Tesla to accrue significant revenue from which would change TSLA's trajectory as a stock.

@davet, I just can't let go of this. Here's the reason. You and I are both heavily long TSLA, but for different reasons. My concern is that if someone believes your premise that Tesla Automotive is fairly valued even if they reach $47B in revenue in 2020 (your number) that they will miss out on an incredible run up in TSLA.

First let's discuss Tesla's current valuation. They have been in the penalty box with WS for more than a year. The primary reason is the year plus delay in fixing the quality problems with the Model X and getting it into full production. This was finally resolved in Q3, but despite 50% QoQ sales growth and GAAP profitability, none of the analysts made material increases in their model or price targets. This was due to another penalty, which was Elon announcing the SolarCity acquisition and tanking the stock just weeks after those buy side analysts had recommended Tesla's secondary offering. As a result, Tesla has gotten no credit for the operating leverage it demonstrated in Q3 and there is high skepticism about the Model 3 production ramp up.

If TA is to reach $47B in revenue in 2020, then sometime in the next 12-18 months they will have demonstrated that they can successfully ramp production on the Model 3 to make that revenue level possible. I suspect this will happen around the end of 2017. At that point the skeptical WS analysts will be forced to confront the reality that Tesla will be delivering 500K-1M cars by 2020. Their revenue and valuation models will have to be significantly increased leading to a dramatic run up in the stock price. So if TSLA+SCTY is currently valued by the market at ~$30B, what should this higher valuation be? That is where you and I apparently disagree on how WS rewards high growth.

How do we value TA? First off, we need to agree on a metric. As you point out in the case of Amazon, P/E is not a great yardstick because heavy investment in forward growth hurts current profitability. In those cases, price to sales (P/S) can be useful. Admittedly this ratio will vary based on the profit potential of a particular growth company, but at least it is a starting point. Having worked in high growth tech companies for my entire career, I understand how WS gives outsized rewards for high growth, so that is what I am going to focus on in my comparisons.

As stated earlier, I believe Amazon is the closest analog to Tesla, because it is using technology to disrupt very large markets and thus has the potential to be a very large company. You identified AMZN as a unique case, so I've done some research using Morningstar to find some other potential comparables. This is what I found for multi-$B companies in terms of 5 year revenue CAGR and Price to Sales ratios. These companies are drawn from multiple industries because only the market leaders are growing revenues 20% to 50% per year off a $5B-$10B revenue base.

Amazon 26% 3
Facebook 55% 14
Alphabet 21% 6
Baidu 53% 5
Priceline 25% 7
Netflix 26% 6
Broadcom 27% 5
Apple 15% 3
BMW 9% .5
Tesla 103% 4

What can we conclude from this? If Tesla grows to $47B in 2020 that represents a 56% CAGR. Any company in this list growing at least 20% has a P/S of a least 3, and the average is 6. If Tesla is currently "fairly valued" for $47B of revenue in 2020, that is a P/S of .6! Even if we afford TA a P/S multiple of 2, that is almost a tripling in valuation from today and it obviously could be higher.

You could argue that since TA is an automotive company it should be given the same P/S as BMW at .5. But it will grow 6 times faster! And if the automotive industry is in secular decline in 2020 as you predict, wouldn't investors want to rotate out of Ford, GM, etc. for a company that is growing 6-10 times faster in the same industry?

Okay I will end this because I'm becoming repetitive. My bottom line: don't miss out on a huge run up in TSLA if Tesla comes remotely close to achieving the Model 3 production ramp.

 

[Fallenone]

I

@davet, I just can't let go of this. Here's the reason. You and I are both heavily long TSLA, but for different reasons. My concern is that if someone believes your premise that Tesla Automotive is fairly valued even if they reach $47B in revenue in 2020 (your number) that they will miss out on an incredible run up in TSLA.

First let's discuss Tesla's current valuation. They have been in the penalty box with WS for more than a year. The primary reason is the year plus delay in fixing the quality problems with the Model X and getting it into full production. This was finally resolved in Q3, but despite 50% QoQ sales growth and GAAP profitability, none of the analysts made material increases in their model or price targets. This was due to another penalty, which was Elon announcing the SolarCity acquisition and tanking the stock just weeks after those buy side analysts had recommended Tesla's secondary offering. As a result, Tesla has gotten no credit for the operating leverage it demonstrated in Q3 and there is high skepticism about the Model 3 production ramp up.

If TA is to reach $47B in revenue in 2020, then sometime in the next 12-18 months they will have demonstrated that they can successfully ramp production on the Model 3 to make that revenue level possible. I suspect this will happen around the end of 2017. At that point the skeptical WS analysts will be forced to confront the reality that Tesla will be delivering 500K-1M cars by 2020. Their revenue and valuation models will have to be significantly increased leading to a dramatic run up in the stock price. So if TSLA+SCTY is currently valued by the market at ~$30B, what should this higher valuation be? That is where you and I apparently disagree on how WS rewards high growth.

How do we value TA? First off, we need to agree on a metric. As you point out in the case of Amazon, P/E is not a great yardstick because heavy investment in forward growth hurts current profitability. In those cases, price to sales (P/S) can be useful. Admittedly this ratio will vary based on the profit potential of a particular growth company, but at least it is a starting point. Having worked in high growth tech companies for my entire career, I understand how WS gives outsized rewards for high growth, so that is what I am going to focus on in my comparisons.

As stated earlier, I believe Amazon is the closest analog to Tesla, because it is using technology to disrupt very large markets and thus has the potential to be a very large company. You identified AMZN as a unique case, so I've done some research using Morningstar to find some other potential comparables. This is what I found for multi-$B companies in terms of 5 year revenue CAGR and Price to Sales ratios. These companies are drawn from multiple industries because only the market leaders are growing revenues 20% to 50% per year off a $5B-$10B revenue base.

Amazon 26% 3
Facebook 55% 14
Alphabet 21% 6
Baidu 53% 5
Priceline 25% 7
Netflix 26% 6
Broadcom 27% 5
Apple 15% 3
BMW 9% .5
Tesla 103% 4

What can we conclude from this? If Tesla grows to $47B in 2020 that represents a 56% CAGR. Any company in this list growing at least 20% has a P/S of a least 3, and the average is 6. If Tesla is currently "fairly valued" for $47B of revenue in 2020, that is a P/S of .6! Even if we afford TA a P/S multiple of 2, that is almost a tripling in valuation from today and it obviously could be higher.

You could argue that since TA is an automotive company it should be given the same P/S as BMW at .5. But it will grow 6 times faster! And if the automotive industry is in secular decline in 2020 as you predict, wouldn't investors want to rotate out of Ford, GM, etc. for a company that is growing 6-10 times faster in the same industry?

Okay I will end this because I'm becoming repetitive. My bottom line: don't miss out on a huge run up in TSLA if Tesla comes remotely close to achieving the Model 3 production ramp.

I'm always cautious of comparing TSLA's valuation, PE or PS, with internet companies. For internet companies, as long as they have the demand, they can easily scale up. Buy a bunch of computers/data centers, copy codes, demand met. But for Tesla, they need billions of dollars to expand to meet demand, given there is that much. That's the difference between capital light and capital heavy businesses and a critical one that would make valuation multiples greatly different.

 

[Ulmo]

I'm always cautious of comparing TSLA's valuation, PE or PS, with internet companies. For internet companies, as long as they have the demand, they can easily scale up. Buy a bunch of computers/data centers, copy codes, demand met. But for Tesla, they need billions of dollars to expand to meet demand, given there is that much. That's the difference between capital light and capital heavy businesses and a critical one that would make valuation multiples greatly different.

Agree. The one thing that could make this slightly more Internet-like (although with its own set of numbers) is the huge elephant standing in the middle of the room: Dreadnought X.0 level factories. At some point, the Dreadnought level should get high enough that the only limits will be how much material there is on Earth, and how well Tesla takes over the junk yard market and buys up all the recyclable steel and old vehicles for recycling. The material will be brought in by self-driving robot vehicles, and the Dreadnaughts dotting the globe will be outputting goods, including the sun-to-vehicle-and-wall-outlet electricity and transportation supply chains (which includes solar collectors, converters, batteries, and vehicles). The Dreadnaught factories will be so fast that they will be designated "Confined Space Permit Entry Only", i.e., no humans allowed. Input to the factories would be so fast that a funnel of roads would lead into the input for all the self-driving trucks of materials. Outputs would be so fast that landing runways for the goods coming out would be built that funnel back out into the delivery channels (roads) of the self-driving goods (vehicles) laden with more marketable goods to be unloaded at markets (solar panels, inverters, batteries, etc.). These factories will theoretically be so fast that any needed speed is possible. Replacing every vehicle in the whole world in 3 months could be just a setting on the factory.

I have to ask when and how fast to know what numbers to plug in, but we'll start to see some evidence of that depending on our vantage points.

 

[EinSV]

I

@davet, I just can't let go of this. Here's the reason. You and I are both heavily long TSLA, but for different reasons. My concern is that if someone believes your premise that Tesla Automotive is fairly valued even if they reach $47B in revenue in 2020 (your number) that they will miss out on an incredible run up in TSLA.

First let's discuss Tesla's current valuation. They have been in the penalty box with WS for more than a year. The primary reason is the year plus delay in fixing the quality problems with the Model X and getting it into full production. This was finally resolved in Q3, but despite 50% QoQ sales growth and GAAP profitability, none of the analysts made material increases in their model or price targets. This was due to another penalty, which was Elon announcing the SolarCity acquisition and tanking the stock just weeks after those buy side analysts had recommended Tesla's secondary offering. As a result, Tesla has gotten no credit for the operating leverage it demonstrated in Q3 and there is high skepticism about the Model 3 production ramp up.

If TA is to reach $47B in revenue in 2020, then sometime in the next 12-18 months they will have demonstrated that they can successfully ramp production on the Model 3 to make that revenue level possible. I suspect this will happen around the end of 2017. At that point the skeptical WS analysts will be forced to confront the reality that Tesla will be delivering 500K-1M cars by 2020. Their revenue and valuation models will have to be significantly increased leading to a dramatic run up in the stock price. So if TSLA+SCTY is currently valued by the market at ~$30B, what should this higher valuation be? That is where you and I apparently disagree on how WS rewards high growth.

How do we value TA? First off, we need to agree on a metric. As you point out in the case of Amazon, P/E is not a great yardstick because heavy investment in forward growth hurts current profitability. In those cases, price to sales (P/S) can be useful. Admittedly this ratio will vary based on the profit potential of a particular growth company, but at least it is a starting point. Having worked in high growth tech companies for my entire career, I understand how WS gives outsized rewards for high growth, so that is what I am going to focus on in my comparisons.

As stated earlier, I believe Amazon is the closest analog to Tesla, because it is using technology to disrupt very large markets and thus has the potential to be a very large company. You identified AMZN as a unique case, so I've done some research using Morningstar to find some other potential comparables. This is what I found for multi-$B companies in terms of 5 year revenue CAGR and Price to Sales ratios. These companies are drawn from multiple industries because only the market leaders are growing revenues 20% to 50% per year off a $5B-$10B revenue base.

Amazon 26% 3
Facebook 55% 14
Alphabet 21% 6
Baidu 53% 5
Priceline 25% 7
Netflix 26% 6
Broadcom 27% 5
Apple 15% 3
BMW 9% .5
Tesla 103% 4

What can we conclude from this? If Tesla grows to $47B in 2020 that represents a 56% CAGR. Any company in this list growing at least 20% has a P/S of a least 3, and the average is 6. If Tesla is currently "fairly valued" for $47B of revenue in 2020, that is a P/S of .6! Even if we afford TA a P/S multiple of 2, that is almost a tripling in valuation from today and it obviously could be higher.

You could argue that since TA is an automotive company it should be given the same P/S as BMW at .5. But it will grow 6 times faster! And if the automotive industry is in secular decline in 2020 as you predict, wouldn't investors want to rotate out of Ford, GM, etc. for a company that is growing 6-10 times faster in the same industry?

Okay I will end this because I'm becoming repetitive. My bottom line: don't miss out on a huge run up in TSLA if Tesla comes remotely close to achieving the Model 3 production ramp.

Very interesting post and comparison.

PEG ratio is often used to compare valuations for companies with different growth rates. Using the same principle, I converted the numbers above to a PSG (Price/Sales/Growth) ratio, and then inverted it (1/PSG) to make it is easier to read.

By this metric, the only company with a valuation close to Tesla is BMW, but it is not a high growth company. By this metric, Tesla is undervalued by a factor of 2.4-7.3 compared to other high growth companies. Something to think about.

As noted by others, Tesla is somewhat unique in being a very high growth company in capital-intensive industries, but it seems to me that the need for capital is primarily an issue of potential dilution. The more cash that is generated the less dilution is an issue, and Tesla has already started generating substantial amounts of cash.

Alphabet: 3.5
Priceline: 3.57
Facebook: 3.92
Netflix: 4.33
Apple: 5
Broadcom: 5.5
Amazon: 8.67
Baidu: 10.7
BMW: 18
Tesla: 25.75

 

[TMSE]

Agree. The one thing that could make this slightly more Internet-like (although with its own set of numbers) is the huge elephant standing in the middle of the room: Dreadnought X.0 level factories. At some point, the Dreadnought level should get high enough that the only limits will be how much material there is on Earth, and how well Tesla takes over the junk yard market and buys up all the recyclable steel and old vehicles for recycling. The material will be brought in by self-driving robot vehicles, and the Dreadnaughts dotting the globe will be outputting goods, including the sun-to-vehicle-and-wall-outlet electricity and transportation supply chains (which includes solar collectors, converters, batteries, and vehicles). The Dreadnaught factories will be so fast that they will be designated "Confined Space Permit Entry Only", i.e., no humans allowed. Input to the factories would be so fast that a funnel of roads would lead into the input for all the self-driving trucks of materials. Outputs would be so fast that landing runways for the goods coming out would be built that funnel back out into the delivery channels (roads) of the self-driving goods (vehicles) laden with more marketable goods to be unloaded at markets (solar panels, inverters, batteries, etc.). These factories will theoretically be so fast that any needed speed is possible. Replacing every vehicle in the whole world in 3 months could be just a setting on the factory.

I have to ask when and how fast to know what numbers to plug in, but we'll start to see some evidence of that depending on our vantage points.

Great points! What you just explained can be summed up as 'capital efficiency'. For an ordinary factory, there is huge upfront cost, and there is upper limit on the output. For modern car factories, it is about 400k cars per year.

What Tesla aims to do with the dreadnought, is to increase the output 2 to 2.5 fold to a million cars per year. As Capex intensity is reduced 2.5 times, the P/S ratio should be increased by same multiple, for the same given growth rate. So, for TA alone, P/S should be about 10 instead of the current 4. For market to accept this P/S, the Fremont factory output has to go well beyond 400k. So, when Tesla breaks past, say 600k cars, from the same Fremont plant, the P/S ratio will expand.

 

[Matias]

I'm currently fairly disenchanted with the culture here on TMC .

It is just pain from the fact, that the share price is at the same level as three years ago. Here are many people, who have lost a lot of many on Tesla.

 

[dennis]

I'm always cautious of comparing TSLA's valuation, PE or PS, with internet companies. For internet companies, as long as they have the demand, they can easily scale up. Buy a bunch of computers/data centers, copy codes, demand met. But for Tesla, they need billions of dollars to expand to meet demand, given there is that much. That's the difference between capital light and capital heavy businesses and a critical one that would make valuation multiples greatly different.

I'd love to compare TSLA with $10B+ non-internet companies that are growing revenues 25%-50% per year. It's just hard to find them. Here are a couple of biotechs:

Gilead 33% 3
Biogen 18% 6

I still stick by my minimum P/S ratio of 3 for Tesla, since every single one of the companies I have found that have grown at even half the rate of what Tesla will achieve if it gets to $30B by 2019 or $47B by 2020 have a P/S of at least 3 and they average 6. That implies a valuation of $90B-$140B in 3-4 years. I know it sounds improbable but it is almost solely based on Tesla achieving an unprecedented manufacturing ramp for the Model 3.

Can anyone find a counter example, i.e. a company growing revenues at 25%-50% CAGR that WS values with a P/S ratio of less than 3?

What Tesla aims to do with the dreadnought, is to increase the output 2 to 2.5 fold to a million cars per year. As Capex intensity is reduced 2.5 times, the P/S ratio should be increased by same multiple, for the same given growth rate. So, for TA alone, P/S should be about 10 instead of the current 4. For market to accept this P/S, the Fremont factory output has to go well beyond 400k. So, when Tesla breaks past, say 600k cars, from the same Fremont plant, the P/S ratio will expand.

The thing is, since sales will be expanding rapidly with the Model 3 we don't need the P/S ratio to expand at all in order to see TSLA at least triple.

 

[Matias]

Agree. The one thing that could make this slightly more Internet-like (although with its own set of numbers) is the huge elephant standing in the middle of the room: Dreadnought X.0 level factories..

One has to remember, that Dreadnought at the moment is Elon's goal. There is no Dreadnought at the moment. It may or may not materialize.

 

[Fallenone]

I'd love to compare TSLA with $10B+ non-internet companies that are growing revenues 25%-50% per year. It's just hard to find them. Here are a couple of biotechs:

Gilead 33% 3
Biogen 18% 6

I still stick by my minimum P/S ratio of 3 for Tesla, since every single one of the companies I have found that have grown at even half the rate of what Tesla will achieve if it gets to $30B by 2019 or $47B by 2020 have a P/S of at least 3 and they average 6. That implies a valuation of $90B-$140B in 3-4 years. I know it sounds improbable but it is almost solely based on Tesla achieving an unprecedented manufacturing ramp for the Model 3.

Can anyone find a counter example, i.e. a company growing revenues at 25%-50% CAGR that WS values with a P/S ratio of less than 3?



The thing is, since sales will be expanding rapidly with the Model 3 we don't need the P/S ratio to expand at all in order to see TSLA at least triple.

Yeh I agree non-internet capital heavy companies with similar growth rate is hard to come by. But a quick screen on Fidelity still returns close to 20 of companies that are growing revenue at 50% or more but with 2 or lower PS, many even below 1. Most of them are restaurants or household durable. I think PS ratio of 3 for Tesla, cars only, is fair value. 2 is more like min. Coincidentally, a forward PS of 2 at the beginning of this year gives about $140 for the share price. Right where TSLA hit the lowest.

And for the difficulty of expansion, Model 3's story is kinda the perfect story to show how hard it is to expand supply in this capital intensive industry. It takes billions of dollars, years of planning and execution to arrive there. There's a lot of risk in between and having a limbo for the valuation or the stock price is, IMO, not unfair.

 

[winfield100]

The Dreadnaught factories will be so fast that they will be designated "Confined Space Permit Entry Only", i.e., no humans allowed. Input to the factories would be so fast that a funnel of roads would lead into the input for all the self-driving trucks of materials. Outputs would be so fast that landing runways for the goods coming out would be built that funnel back out into the delivery channels (roads) of the self-driving goods (vehicles) laden with more marketable goods to be unloaded at markets (solar panels, inverters, batteries, etc.)

a cautionary note:
sometime between 60 to 80 years ago there was a science fiction story about Auto(matic) factories written that points out;

when the AI running the factory needs input materials and starts poaching other factories for raw materials (and finished goods) and the neighboring countryside for it's raw materials and the difficulties if it is threatened to the general population

(back to lurk mode)

 

[dennis]

Yeh I agree non-internet capital heavy companies with similar growth rate is hard to come by. But a quick screen on Fidelity still returns close to 20 of companies that are growing revenue at 50% or more but with 2 or lower PS, many even below 1. Most of them are restaurants or household durable. I think PS ratio of 3 for Tesla, cars only, is fair value. 2 is more like min. Coincidentally, a forward PS of 2 at the beginning of this year gives about $140 for the share price. Right where TSLA hit the lowest.

That's interesting. Could you please post the names so I can find them in Morningstar to get the same comparisons? Here is what I could find for restaurants on Morningstar. CMG: Chipotle Mexican Grill Inc Class A Top Competitors and Peers.

Starbucks 12% 4
Chipotle 20% 3

Chipotle doesn't even make the $10B minimum annual revenue I am looking for to try and match to TSLA, as it is only around $4B. Starbucks is $20B.

 

[viKtor slamet]

That's interesting. Could you please post the names so I can find them in Morningstar to get the same comparisons? Here is what I could find for restaurants on Morningstar. CMG: Chipotle Mexican Grill Inc Class A Top Competitors and Peers.

Starbucks 12% 4
Chipotle 20% 3

Chipotle doesn't even make the $10B minimum annual revenue I am looking for to try and match to TSLA, as it is only around $4B. Starbucks is $20B.

Dennis, You need to look at Gross Profit. I think P/S is hard to compare, due to varying Gross Margin.

Facebook Gross Margin is 90%, even with high OPEX, they can still pocket 40% Operating Margin. Thus they can have high P/S multiples of 16-17.

Chipotle on the other hand Gross Margin is at 21%. Thus, P/S is only 3. Also they are declining Y/Y.

GM/Ford Gross Margin is at 10-12%. Thus P/S is only 1. Alo they are declining Y/Y

Tesla Gross Margin is at 26%. But they are growing with 60% CAGR. Not sure what's the appropriate P/S. For me 5-8 P/S would be appropriate.

Comparing against hardware company: Nvidia NVDA is 50% Gross Margin, growing at 40-50% Y/Y. it has P/S of 8. but NVDA enjoys almost double the Gross Margin% of Tesla. Hence, higher P/S.

I have mentioned many times the focus should be Gross Margin. Tesla really need to charge more, not on the base trim Model S/X, but on the P100DL. They should charge $20-30K more. Because typically if someone is willing to spend $150-160K, for the best product out there, adding $20-30K is not much difference. There are always these kind of people who wants max options on everything whether it's iPhone, iPad, or cars like Model S/X, and Tesla should double-down on pricing for this highest end trim.

 

[Drax7]

If tesla maintains a sustainable competitive advantage coupled with pricing power
And a sales growth rate above 50% for the next 3 years, its valuation will be sustainably
Higher .
If it can achieve 10% net profit margins on $47 billion in sales , that translates into
$4.7 billion in net profit, and a valuation in my view above $100 billion.

Price to sales valuations apply to mature companies at best, not those
Along the steep S curve ramp.

 

[dennis]

If tesla maintains a sustainable competitive advantage coupled with pricing power
And a sales growth rate above 50% for the next 3 years, its valuation will be sustainably
Higher .
If it can achieve 10% net profit margins on $47 billion in sales , that translates into
$4.7 billion in net profit, and a valuation in my view above $100 billion.

Price to sales valuations apply to mature companies at best, not those
Along the steep S curve ramp.

I agree with what you said except for the statement that I bolded. I think price to sales is appropriate regardless of growth rate so long as the company is above a certain size. Higher growth gets a higher P/S and as Viktor points out above higher gross margin also get a higher P/S. Consider the following 4 companies all growing at around 25%:

Amazon 26% 3
Broadcom 27% 5
Netflix 26% 6
Priceline 25% 7

Amazon is in a lowest margin business and has the lowest P/S, but it is still at 3 because of their growth. Then consider Facebook:

Facebook 55% 14

They have both very high growth and very high gross margins so they get a much higher P/S. I just want to reiterate that Tesla's P/S should be at least 3 in 2019 given a 50%+ CAGR and gross margins better that Amazon. That equates to $100B minimum valuation in 2019 and it could even be double that with a P/S of 6.