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Blind Faith Price Targets

Discussion in 'TSLA Investor Discussions' started by jhm, May 28, 2015.

  1. jhm

    jhm Active Member

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    #1 jhm, May 28, 2015
    Last edited: May 28, 2015
    Many people have asked to have a thread devoted to Blind Faith Price Targets. So here's kicking it off.

    Prior discussion of the methodology and BFPT updates occur at the following location. Going forward I hope to keep all updates and discussion in this thread.

    The original idea roughly
    Long-Term Fundamentals of Tesla Motors (TSLA) - Page 240

    Simple update
    Short-Term TSLA Price Movements - 2015 - Page 302

    Buying near the bottom
    Short-Term TSLA Price Movements - 2015 - Page 398

    Update with application to a LEAP
    Short-Term TSLA Price Movements - 2015 - Page 499

    Update with a simple exit strategy
    Short-Term TSLA Price Movements - 2015 - Page 538

    Rationale of Long-Term Target with consideration of stationary storage
    Short-Term TSLA Price Movements - 2015 - Page 578

    Update and catching a nice pullback opportunity
    Short-Term TSLA Price Movements - 2015 - Page 595

    Update with good discussion from others
    Short-Term TSLA Price Movements - 2015 - Page 689
     
  2. jhm

    jhm Active Member

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    Update and how to adjust your own long-term target.

    Currently, Tesla is trading at $251, and with respect to a s3739.82 long-term price target for the end of 2025, that implies a 29.02% discount. This implied discount is at the 45th percentile for the last twelve months. So we are just a tad below netral sentiment. At this sentiment the BFPT 12 months out is $324, while the min sentiment BFPT is $257. So if you're time horizon is well beyond 12 months, the upside is fair and downside is pretty limited. Personally, I am already quite overweight on the stock, so I am not accumulating at these prices.



















































    Percentile Imp Discount 5/28/2015 1/15/2016 5/28/2016 1/20/2017
    45.45 29.02% $251 $295 $324 $382
    0 32.19% $194 $232 $257 $308
    25 30.23% $227 $269 $296 $352
    50 28.49% $262 $307 $337 $397
    75 27.47% $285 $333 $364 $426
    100 25.47% $337 $390 $424 $491
    Some people may be interested in how these targets change if you assume a different long-term price target. Our LTPT is 10.603 years away, so while you could replicate the analysis with a different LTPT, I would like to suggest an approximation. It basically comes down to an adjustment to the implied discount rate. I will illustrate with an example.

    The LTPT we have assumed is $3739.82. Suppose we believe a $5000 target is more suitable. Let's suppose we want the minimum sentiment 12 months out. The minimum sentiment BFPT for today is $194. So from this to $5000 in 10.603 years is an implied discout of 35.86% = (5000/194)^(1/10.603) - 1. Note that this is a few points higher than our previous implied discount of 32.19%. This is because we are now assuming a higher LTPT. To take this out a year we compute $263.57 = 194×(1 + 0.3586). So are original 12 month min sentiment BFPT was $257, but under the $5000 LTPT we get $264.

    While $5000 is substantially larger than $3740, this difference only translates into a $7 difference in our 12 month target. For me personally, this is not a big enough difference to change my investment strategy, so I'm comfortable with making either long-term assumption. I'd encourage people to try their own sensitivity analysis to see if they are comfortable with the assumptions being made. I'd love to hear back what people find.

    As always, make your own mistakes and good luck!
     
  3. adiggs

    adiggs Active Member

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    Thanks for pulling this out into its own thread and providing the links to the back story. I haven't seen these previously but I like the info.
     
  4. SteveG3

    SteveG3 Active Member

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    #4 SteveG3, May 28, 2015
    Last edited: May 28, 2015
    Hi James. I just read your first post on the "Blind Faith Price Target" (post 2400 on the Long-Term Fundamentals thread).

    I appreciate your effort, but I'm not totally clear on what the purpose of the "BFPT" is. Could you describe how this tool is meant to be used?

    I ask you this as in reading that original post, I see you wrote,

    "I call this the blind faith model. At the recent CC, Musk provided us with a back of the envelope estimate of market cap, $700B by 2025. So let's take it as a matter of blind faith that the stock price will reach $5500 by the end of 2025. After all, Elon said it, and that's good enough for me. So if the stock price grows exponentially from here to there, where does that put the price in 1 year, 2/19/2016?"

    From having read many of your posts, I'm extremely confident you were not intending to suggest that anyone take Elon's $700B as a blind faith expectation for which to invest in Tesla, and you're "good enough for me" comment was just a joke.

    I can, however, see the possibility of the Seeking Alpha crowd, or even Jim Cramer, disingenuously citing this as evidence that Tesla is a "cult" stock, and that Tesla bulls are no more than clueless fans of Musk. For over two years Cramer has been trying to hammer the notion that Tesla is a "cult" stock "that can't be valued" (in my view simply false statements to try to scare away investors). We've seen analysts, journalists, and the Seeking Alpha crowd all plumb TMC for scraps they can present out of context to support some gibberish they want to sell... I'm somewhat concerned about handing them a scrap that will fit so well with gibberish they've already invested two years of negative campaigning to create the impression their gibberish is common sense (that we're a bunch of market chumps with no sense of reality but only blind faith in Elon Musk).

    Could you clarify what you see as the purpose of this tool and why you've chosen the $700 billion 2025 market cap as an assumption in its construction? Does the meaning of the tool in any way depend on the that target or was it something of an arbitrary input?
     
  5. JRod0802

    JRod0802 Member

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    I think this thread is more geared towards looking at what it would look like if Elon was right, and then comparing that to reality over time.
     
  6. Jonathan Hewitt

    Jonathan Hewitt Active Member

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    Agreed. And as jhm pointed out you can change the final target by quite a bit and it doesn't changed out 1 year PT that much so having exactly a 700 Bil Market Cap isn't that big of an input.

    Maybe the name should be changed to avoid bear FUD...
     
  7. jhm

    jhm Active Member

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    SteveG3,

    I've added some annotation to the list of past posts in the OP to help people navigate the development of the idea. So I would encourage you to keep reading through that background ground because I think it will answer many of your questions.

    The basic idea is to understand Musk's view of Tesla's long-term term growth potential. The most essential assumption he makes is that Tesla should be able to grow revenue by about 50% per year for the next ten or more years. Recent developments in stationary storage reinforce this outlook. The second key assumption is that Tesla will work towards a 10% profit margin across the business. This assumption is hard to support with recent experience, but Tesla has exhibited a strong commitment toward hitting gross margin goals. The combination of solid GM and scale does work toward realizing a solid profit margin some years out.

    So if Musk's basic intention is to grow revenue roughly 50r per year will exercising profit discipline leading to 10% profit margin, where does that put Tesla in 2025? Revenue is about $350B and earnings at about $35B, whence the market cap of $700B follows from 20 times earnings. So that's the basic target.

    The idea of a blind faith target is to suppose that the $700B market cap, or $3740 per share after allowing 4% annual dilution. Under that scenario, and it is just a scenario, the question is how much does the market really buy into that scenario. So if we look at recent prices, we can calculate an implied discount. Now the market has a great many good reason not to take Musk's $700B at full value. The is a tremendous amount of uncertainty that the market must price into that sort of grand vision. But it is what it is, and the market will discount it as much as it wants to.

    However, the market does tend to swing from moments of bearish sentiment to bullish sentiment. The amont of discount does vary widely over the course of 12 months. So while market sentiment may be rather bipolar, the longterm vision does not change that much, and progress toward that vision continues it a fairly robust pace. Thus, we can interpet price swings and specific variation in implied discounts as mostly fluctuations in market sentiment. If we look at the distribution of implied discounts over the last 12 months, we can make the assumption that this distribution may not change that much over the next 12 months. Under this sort of distributional assumption, then we can deduce a distribution of near term price targets. These price targets are all indexed by the percentile of sentiment for discount and time to the long term target.

    The upshot of this analysis is that we can guage market sentiment and this helps us with a trading strategy based on buying when sentiment is unsustainably low and selling when sentiment is unsustainably high. This suggest a long-term trading channel where the longterm trajectory is based on the company's long-term ambition, and the spead in the channel is calibrated to the last 12 months of trading. So users need to understand that if the longterm vision changes or progress toward that goal is substantially accelerated or decelerated, then the tool must be adjusted or abandoned. Also if sentiment tends to remain stuck too bullish or too bearish for more than half a year, then a 12 month calibration period may not be wide enough. We need to be able to look back over the last 12 months and see that the market has tested the extremes of sentiment. If sentiment does not cycle a few times in a year, the easy fix is to use more than 12 months of history. Additionally, we should expect a little bit of drift in the discount distribution, and this is why I prefer to look at just the most recent 12 months. The distribution will change over time, but we assume that Chang will be slow enough that nearterm price targets are well calibrated.

    So with any methodology, we need to be alert to changing situations and reassess the adequacy of assumptions from time to time. In my updates, I aim to give updated estimates along with commentary to the present situations. This should help establish a track record and alert us to emerging issues. So far the method seems to have done a good job of identifying buying opportunities at prices below $210 in recent history. Moreover it cautioned against taking a profit too soon, and we have seen even today that holding out for bullish sentiment may be worth the wait. Always I caution people to make their own mistakes blindly following a blind faith tool. It is enough that this tool gages sentiment. It simply gives an investor a bit of perspective to aid in making a broadly informed decision.

    So why do I call this the Blind Faith Price Target method? It is a way of taking the broad vision of Elon Musk or any company and using it a guage to just how much belief or disbelief the market puts into that vision. Obviously, the market does not believe this vision enough to discount it as it would a Treasury bond. That would be something like pure faith, and that would be dangerous. A great virtue of this approach is that it alerts us to times when too much faith is extended. When the implied discount gets to the extreme low end, watch out. Sentiment that is too bullish is simply not sustainable. So while the name is a bit tongue in cheek about Blind Faith, it actually is a tool meant to warn us against extending too much blind faith. Sure, FUDsters can twist this any way they like. They are willfully ignorant on a great number of things. But Blind Faith is a tool for measuring when there is too much faith and too little faith being put into a visionary company. A smart investor will want to discern the difference so that they can be greedy when others are fearful, and fearful when others are greedy.
     
  8. Quant

    Quant Member

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    There is no such thing as a blind faith price target! There is faith and a long term thesis where one looks at things from a macro standpoint and waits for things to play out over 5 or more years. And there are stock price targets which are not based on faith but some logical bottom up valuation methodology which may or may not be flawed in either the assumptions or the model methodology etc, or both.

    An analogy would be science and faith/religion. You can't have blind faith science or science based religion! So, it is nonsensical.

    So, I would submit that the subject or thread heading is illogical to the point where even Elon Musk would be say that is crazy nonsense!

    Why let Elon down?
     
  9. eloder

    eloder Member

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    It's no different than using company guidance to set a stock price point in 12 months, only he's just going out 10 years off of expectations of Musk and his stated milestones/goals.
     
  10. jhm

    jhm Active Member

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    The easiest way to predict the future is to create the future. When Musk looks at Tesla he sees the potential to grow it 50% annually for over ten year. This is not a matter of predicting what Tesla will do. It is a matter of deciding what to do with Tesla. Will, intention and vision are matters of faith. What makes this blind is our inability to see clearly how will, intention and vision will manifest in concrete actions leading to fulfillment. Prior to April 30, how many of us knew that Tesla would market Powerpacks at $250/kWh? Without that information we were basically blind to what stationary market Tesla would address. We still have great difficulty anticipating how big this market may be. However, the problem is very different for Musk. He thinks about how much market Tesla wants to address, determines a suitable price to enter, and presses the organization to figure out how to achieve the required price target. So for Musk it is mostly a question of how to direct Tesla and that is an exercise in will, intention and vision. Investors may be the last to know how exactly Musk will lead this organization. You can build up whatever ground up model you like from whatever set of facts you may have on hand, but Musk has made it clear what his vision and intention are. Specifically, he intends to grow revenue 50% per year and realize a 10% profit margin in ten years. So the question for investors is to what degree do you believe that Tesla will make good on Musk's stated intentions. This is faith. It is trust in leadership. Certainly you can buttress your confidence with whatever facts you can call to mind, but at some point you will to believe or not to beileve those things you do not yet see. This is blind faith. Moreover the market is constantly changing its mind about what it believe and what it does not believe. Price targets are simply a guage on how much faith the market is extending or refusing to extend. Is it possible to quantify faith? Absolutely, because market prices are a function of sentiment. They always reflect the degree to which the market believes that Tesla will create shareholder value. So for me there is no contradiction between blind faith and price targets. One is simply the quantification of the other.
     
  11. vgrinshpun

    vgrinshpun Active Member

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    This is absolutely spot on.

    And for for the doubters, just consider the future that Musk *created* with both Space X and Tesla Motors (Energy). These companies are a manifestation of his vision, leadership and skill. This is rock solid track record in making the future that nobody else could have envisioned, and absolute majority could not believe into once it was presented to them, a reality.

    I think that the BFPT is an excellent tool in evaluating how the Market buys into the big picture presented by Musk.

    Thank you, James for another excellent contribution to the Forum.
     
  12. jhm

    jhm Active Member

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    Thanks for reminding us of Musk's broader track record as a serial and parallel entrepreneur. I suspect that is Musk did not personally see the opportunity to grow at least 50% per year, he would not be interested in being CEO of Tesla. He's got so many opportunities to grow his wealth faster than that. He's not going to waste his time on lesser opportunities. This is something I've dubbed the "Musk Rate of Return" or MRR. MRR > 50%.

    I've had recourse to MRR as way to develop a suitable long-term price target for SolarCity to develop BFPT for that stock. The MRR should apply to any Musk related company for which Musk takes an active role and holds significant interest. So it would be applicable to SpaceX and Hyperloop Technologies in addition to Tesla and SolarCity. It is significant that Musk sold PayPal. Does anyone follow that company close enough to know what its growth rate has been in recent years? My hypothesis is that it grows well below the MRR.
     
  13. Drax7

    Drax7 Active Member

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    #13 Drax7, May 29, 2015
    Last edited: May 29, 2015
    Totally agree with this view, and models like this can be dangerous if you actually believe
    that reality will conform to them. Never let go of your common sense .

    especially given the fact that markets can remain irrational longer than you can
    stay solvent.
     
  14. SteveG3

    SteveG3 Active Member

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    James,

    I read your post from last night, and very much appreciate your thorough response. I want to take your suggestion and reread the other posts you mentioned before I respond to the points we've been discussing. As it happens, I'm driving 500+ miles today... so I don't see myself getting to this today.

    I do, however, just want to suggest that there's an alternative to talking about this in terms of faith, believers, and doubters... but rather in terms of confidence. Indeed, I think part of why there's so much appreciation for Elon Musk is the fact that he acts so untiringly with a sense that his actions can make a difference. One can call that sense confidence or faith. I'd go with confidence, as while Musk sees his actions making a difference, I think the scientist in him knows he does not "control" reality. You'll notice 1) he tends to discuss future events in terms of probability, 2) he's lived the reality of the Roadster, Model S, and Model X being late, and Space X blowing through it's three chances of success to luckily make it on a fourth chance from scraped together crumbs of capital, and 3) this very $700 billion market cap notion he introduced on the Q4 call, he immediately clarified was not guidance, (I believe what he said was ~<I'm not saying this would happen, but I bet that it will.> For me, "bet" echoes the notion of probability). Bottom line, I think Musk has the optimism of someone who believes he can collaborate with reality... neither "control" it, nor resign to "obey" it. That said, within Tesla, he may do a bit of pushing as if he expects "control" of reality from his engineers, as a performance tool similar to Jobs "reality distortion field," but even if he does, I'm confident he does not lose awareness that he's using a device he doesn't literally believe to be true.
     
  15. Citizen-T

    Citizen-T Active Member

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    It's too late now to change the name. Blind Faith Price Target has entered the TMC lexicon and won't be easily supplanted.
     
  16. austinEV

    austinEV Active Member

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    It's not unreasonable to model long term valuation. This is one such model, a very simple one. The name is sort of off-putting because it does sound like a worshipful thing, but the numbers behind it are not so different from what other Bulls have modeled. As models go, it has the advantage of simplicity, and because Musk specifically laid it out. And, as jhm points out, if you alter the projection a little bit it doesn't really matter. It would be healthier if a few other people started threads with *their* models along with this one, but they would agree more than disagree.

    I think the opportunity is to just take this to it's logical conclusion, which I have done half-heartedly on my private model. Create a set of investing guidelines based on where the market is trading relative to this model or others. JHM's implied discount can be expanded. If you think about it, if these Bull models play out, in hindsight we will look at the chart and see a price that rises over time, but wanders around en route. Sometimes it will be towards the bottom of the channel (as it was 2 months ago) and sometimes it will be on the high side (as it was at the ATH). I suspect these prices will form something of a Gaussian curve with the median being somewhere in the middle of the implied channel. Where we could add value is by showing where we are on that Gaussian and say that if we are say 2 sigmas from median, we should trade accordingly, heavy in calls for 2-3 sigmas away from median on the low side and heavy on cash (or god forbid, puts) 2-3 sigmas away on the high side. Otherwise, whats the point of tracking these like this.

    I am not whining for someone else to do this, I will if I get the time :)

    (with all the heavy disclaimers about invest at your own risk, yada, yada)
     
  17. 9837264723849

    9837264723849 Member

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    #17 9837264723849, May 29, 2015
    Last edited: May 29, 2015
    Say
    1. Tesla manages to increase unit sales by 50% every year until 2025, as projected by Elon. This makes 3.17M units, almost as many as BMW's 1.81M and Daimler's 1.72M.
    2. The average selling price is 53,000$, between BMW's 51,700$ and Daimler 54,400$. Tesla would then makes 168B $ in revenue in 2025.
    3. Tesla manages to make 10% profit on this, far more than BMW (7.15%) and Daimler (8.02%).

    Then, the market capitalization of the company would have to be 42x the company's earnings to reach the 700N $, as alluded by Elon.

    Can Tesla actually:
    - increase car production from 50K to 3.2M within 10 year? Tesla would have to make more than 6 times the output of the NUMMI factory when it was used by GM-Toyota.
    - keep their prices very high, as they go down-market while averaging 20K $ above the Model III's 35K $ target
    - make more money on each sale than their German counterparts
    - and have the market value the company at 42x its earnings (while BMW is currently at 11x and Daimler 17x)?

    Here's a uninformed guesstimate for the energy storage business:

    Assuming that:
    1. 5M households install PV panels on their roof in 2025
    2. 50% of them purchase a 10 kwh battery, only made by Tesla
    3. the Powerwall sells at 120$/kwh in 2025 (5% yearly decrease from an estimated 200$/kwh today).

    This would make 15B $ of additional sales. If utility and commercial make the sames amount of storage each, at the same price, the total revenue from storage would rise to 44B $.
    Using the 168B $ of sales from the automobile and 10% of EBIT, the stock would have to be valued 33x its earnings (21B) for the market cap to reach AAPL's 700B.

    This still seems freaking high to me. What do you think of these hypotheses and of the line of reasoning?
     
  18. Lessmog

    Lessmog Member

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    Even more uninformed: I think you may have forgotten the industrial use of batteries, for companies and utilities. That part seems to have a bigger potential market than domestic. And there may be other, so far unknown, branches of business for Tesla, such as manufacturing GFs as a product. Elon Musk is one innovative, disruptive genious! I just can't be bothered to find my abacus this late ...
     
  19. jhm

    jhm Active Member

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    I would point out that Musk's 50% growth rate specifically applies to revenue, not unit sales. We need to stop thinking in terms of unit sale growth because this gets us sidetracked on issues like what the product mix will be. I dont think even Musk can anticipate what percentage of revenue in 2025 will come from autos. Until recently Musk thought that stationary storage would take about 30% of Gigafactory capacity, but now he's leaning toward 70%, which is why Gigafactory 1 could get 50% more capacity.

    So if even Musk can't predict the revenue mix between autos and stationary out just a year or two, how can we have any hope of nailing down what 2025 will look like? This is the folly of trying to build a revenue stream from the ground up. Is all lost? Not at all, because building out an enterprise has full of great many opportunities and options. Suppose that the stationary business is able to double every year, while the auto business slugs along at 30% annual growth in revenue. 50% growth is still quite feasible simply by growing the stationary business bigger and faster. Or suppose autos steps upto 80% growth in revenue, while stationary moves at 20%. 50% annual grow is still obtainable by maxing out the auto opportunity. And there are yet other opportunities flying below the radar, such as the potential to build or tool Gigafactories for other companies, the Gigafactory as product concept. Software-as-a-service is another potential revenue stream some have floated. And there are many more. Remember that Tesla passed on Hyperloop, but if HT takes off with the concept, Tesla could design and manufacture tons of critical elements. The company has the talent to execute on any of this, but point is always to be focused on those opportunities that will yield the highest growth. Talent, opportunity and leadership will work it out. For a multi-entrepreneur like Musk, 50% growth is always doable, even if you don't know exactly what will work out the best.
     
  20. Lessmog

    Lessmog Member

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    And we haven't even touched on Elon's idea about electric jet planes yet ...
     

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