Blind Faith Price Targets

[Johan]

Agree with most of above:
The growth P/E is too low for the 12.5% dilution coupled with assumed profit margin use over those years.
This is especially true because Tesla is attacking capital intensive industries/markets on a broad but vertically integrated strategic path. This not only builds long term value highly resistant to competitive entry, but has near limitless growth potential.
Apple for example is decidly not this; Fast scaling, low capital per profit $, etc. They purposely built cash as a barrier of competitive entry to strategically address this. Allows hem to look longer term and act like a Tesla in strategic thinking. For example, they currently garner 90%+ of all profits in their 'growth' market having accomplished their disruption. Their P/E is low due to uncertain ability to attain more- but supported by 30% of their CapValue being cash

There's going to be a time when when will become apparent and Tesla will be rewarded for exapanding through Cap spending (ala Amazon with near unlimited market availablilty).

Very much true; I've always thought that by attacking businesses and markets that mean they are in fact manufacturing physical objects starting out slow but gradually gaining more and more economy of scale, also requiring that they invest large capital before realizing profits, that require a lot of R&D before realizing profits, that in essence they are front loading risk. This could mean that in retrospect it will become more and more clear that the largest risk Tesla was ever in is behind them. That coupled with their ability to sprout/extend in to new markets creates a combination of, as you say, near limitless growth potential while at the same time extreme first mover advantage/barriers for entry from competition (thanks to the capital intensive nature of the markets they're taking on and also creating de novo).

 

[adiggs]

...They purposely built cash as a barrier of competitive entry to strategically address this. Allows them to look longer term and act like a Tesla in strategic thinking. ...

Can you elaborate on this idea @kenliles? I don't view Apple's cash pile as a barrier for competitive entry to their market. It certainly creates a lot of options for Apple, but they are ultimately meaningless if the company never takes any of them. Your other points make sense to me and I agree.

 

[Fallenone]

I actually came up with a lazier way to get a super-long term valuation based on three assumptions:

1. Tesla sells what they can make, and vice versa. This means they will try to expand production when orders are coming faster than current production, or stop expansion when orders are slowing down.

2. Market will place a "fair" value for Tesla when it becomes more and more mature, accounting almost everything, Model S/X/3, TE, solar, driver-less tech, ride-sharing.

3. Tesla will become "mature" in a few years, about the time when GF1 is fully built and running.

So my way to value TSLA is wait for the market cap when GF1 is fully built and running. Then multiply that market cap by the number of GFs. Easy. Only trouble is don't know what that "unit" market cap is. Mainly because TSLA is doing so many things that are hard to be valued at this moment.

 

[ajax]

Thanks. That's really helpful.

Shares grow 12.5% for 4 years, then 5% for 7 years, that is a CAGR of 7.67%. So maybe we can call it even at about 8%.

It is useful to think about how the market would look at a $1T company. Yeah, things like P/E could easily be impacted. Of course, we know that grow rates impact P/E. So if Tesla is still growing revenue at over 30% annually in 2027, it should command high P/E. How fast is Apple growing at this point? It may be good to gather a little dataset of super high market cap companies and look at cap, P/E and revenue growth.

Historically, Tesla's shares outstanding have risen exactly 8% each year

That's after the SolarCity deal, however, which was non-dilutive in my non-expert opinion. At the end of last April, the CAGR was at 5.4% and if the SolarCity deal didn't happen, it would be at 6.7% right now.

 

[kenliles]

Can you elaborate on this idea @kenliles? I don't view Apple's cash pile as a barrier for competitive entry to their market. It certainly creates a lot of options for Apple, but they are ultimately meaningless if the company never takes any of them. Your other points make sense to me and I agree.

This was one of the original missions of Jobs (and a key to Jobs hiring of Cook). It manifested in 2 ways as follows (I'm cutting to the chase here to shorten, so allow me to be conclusionary)
1) When MSoft was able to dominate early because scaling software was far easier, the 'new' Apple/Jobs was pledged to fix that. Remember contextual: Jobs core belief that the end solution required customer to product vertical integration, i.e. Both hardware and software (and services and retail). His objective was to achieve hardware scaling that rivaled software in speed and flexibility. The key to that was (in addition to sourcing) was the ability to apply near limitless cash to front hardware manufacturing 'on-a-dime'- took many forms as front loading capital for tooling to small manufacturers, etc. etc. (many many examples of how this was excercised)- but he goal was something none else in the consumer electronics industry even tried much less pulled off. Custom hardware that can scale from non-existent to 100s of millions in the span of months... They use cash on call as the weapon to accomplish that

2) In the consumer electronics computer space, university research > small startup > product is the path of nearly all disruption (with some corporate research parks playing the University tech role i.e. Xerox Park. Jobs created an internal Apple pathway between Apple product development and University research to funnel those technologies into Apple products before others could do the same, blindsiding Apple (part of the Jobs culture of obseleting its own products). A key part of that strategy included ready capital for 2 purposes- fast focused internal development scaling and prototyping (Tooling etc.), and even more importantly acquisition of early development companies atracking those technologies. Apple today acquires nearly 1 per month- cash deals- largely behind the scenes because they are very focused tech companies. The cash arsenal is the key asset for implementation of that strategy - they can be wrong many times for every right- much like software development but for hardware on a grand scale. Think of it like trial and error hardware/tech development on the same scale as software- Absorbing those tech developments and /or preventing others from same creates a formidable barrier when applied with focus (a key part of the Jobs culture - as opposed for example to Google's shotgun approach even if cash is avaialable)

Edit - sorry this ended up longer than I thought it would

 

[jhm]

Historically, Tesla's shares outstanding have risen exactly 8% each year

That's after the SolarCity deal, however, which was non-dilutive in my non-expert opinion. At the end of last April, the CAGR was at 5.4% and if the SolarCity deal didn't happen, it would be at 6.7% right now.

Excellent. Thanks for finding this.

I'm looking at

104.30M on Oct 31, 2011
149.89M on Oct 25, 2016
161.09M on Nov 21, 2016

So five years ending on Oct 31, 2016 would have a 7.5% CAGR and this omits the approximately 21M used for the SolarCity deal. Or five years ending Nov 21, 2016 would have 9.0% CAGR inclusive of the deal.

Our numbers are a little different. I suspect you are going back further than I am. (I was too lazy to computer date differences.)

So I think we can narrow this down to something in range of 6.7% and 9.0%. This is a good bit of history. Shares were growing fast before Model S and and in the last few years. So I feel good that we have an upper bound of 9.0%. So the question is in the span of five years who exceptional is the SolarCity deal. Over the next 11 years I think we could see another one but not likely two or more. So think a good estimate going forward is about 8%, maybe 7%.

Does anyone have a reason why it should be higher or lower than 8%?

 

[jhm]

I actually came up with a lazier way to get a super-long term valuation based on three assumptions:

1. Tesla sells what they can make, and vice versa. This means they will try to expand production when orders are coming faster than current production, or stop expansion when orders are slowing down.

2. Market will place a "fair" value for Tesla when it becomes more and more mature, accounting almost everything, Model S/X/3, TE, solar, driver-less tech, ride-sharing.

3. Tesla will become "mature" in a few years, about the time when GF1 is fully built and running.

So my way to value TSLA is wait for the market cap when GF1 is fully built and running. Then multiply that market cap by the number of GFs. Easy. Only trouble is don't know what that "unit" market cap is. Mainly because TSLA is doing so many things that are hard to be valued at this moment.

This is an interesting proposal. Battery capacity is the backbone of Tesla. I have argued elsewhere the battery capacity is how we should measure the advance of the whole EV industry. I find this useful for modeling how long it will take for batteries to disrupt the oil industry. There's a race between batteries and barrels.

So yeah, let's look at Tesla when it has say 200 GWh in production. I think 200 because I think for full maturity it needs to prove it can replicate the GF, not just scale it up. I also think it will be harder to gain market share at that point. So you can then model how fast the industry will grow GWh capacity and assume that Tesla maintains a certain share of that. You can also use the ratio of market cap to GWh to scale the capital ramp to market cap.

It is interesting that in the CC Musk said that TE will have the same GM as TA, but grow twice as fast. One could argue that they should have an even higher GM for TE than for TA because under a constrained supply of batteries they are forgoing more gross profit per kWh with TE products than with autos. That is, for the same GM there is an opportunity cost with putting a kWh into a lower revenue product. However, Musk believes there is faster growth opportunity with TE. Thus, he is willing to trade off gross profit for higher growth. This tells you something about the way Musk values growth.

 

[adiggs]

8% sounds good to me as the primary number.

A note about how changing that number to 7, 9, 6, and 10 might also be valuable for people to see how sensitive the overall model is to that number (and therefore, the importance as we monitor our long term investment, to dilution relative to revenue growth).


I'm also good with keeping it going out 10 years for now, even though I believe dilution drops dramatically somewhere in year 5 to year 10 from today. Year 5 is 2022, and I see Tesla being internally self-funded in that timeframe.

OR the company has stopped dinking around with 1 or 2 GF at a time, and has effectively decided they need to build 1/2 of the global supply of cell and battery factories to fully replace the current ICE transportation industry AND the energy storage industry AND ...

My brain is tilting even trying to describe what that level of investment might look like

 

[jhm]

Self-funding will be a pretty important milestone. I think we'd all benefit from drilling into the question of when that will happen.

Naturally we would expect the share price to advance quickly around the self-funding date. This makes sense not just because is minimizes dilution, but because it minimizes risks for Tesla. Tesla will be able to dive into new investments more freely. The BFPT framework does not explicitly model this, but what ought to happen is that the implied discount should shrink. Right now when the market contemplates Tesla becoming a $1T business, capital raises are a big question mark. Will it be able to get the funding? Willing it get over leveraged? And so on. This uncertainty feeds into how much the market discounts that vision.

So if one knew when Tesla would become self-funding, you would probably want to buy as many shares as you can before that.

So with the LTPT what we have is the terminal value on a DCF model. What we need next are cash flows for the years leading up to that.

 

[ajax]

Excellent. Thanks for finding this.

So five years ending on Oct 31, 2016 would have a 7.5% CAGR and this omits the approximately 21M used for the SolarCity deal. Or five years ending Nov 21, 2016 would have 9.0% CAGR inclusive of the deal.

Our numbers are a little different. I suspect you are going back further than I am. (I was too lazy to computer date differences.)

So I think we can narrow this down to something in range of 6.7% and 9.0%. This is a good bit of history. Shares were growing fast before Model S and and in the last few years. So I feel good that we have an upper bound of 9.0%. So the question is in the span of five years who exceptional is the SolarCity deal. Over the next 11 years I think we could see another one but not likely two or more. So think a good estimate going forward is about 8%, maybe 7%.

Does anyone have a reason why it should be higher or lower than 8%?

You're right about the difference in our numbers. I was going back to 6/30/11.

My gut feeling is that the CAGR will be closer to 6.7% in the medium term and then fall from there. Note that Apple's CAGR over the past 5 years has been -4.3%

I've attached a graph in case anyone is interested.

 

[jhm]

You're right about the difference in our numbers. I was going back to 6/30/11.

My gut feeling is that the CAGR will be closer to 6.7% in the medium term and then fall from there. Note that Apple's CAGR over the past 5 years has been -4.3%

I've attached a graph in case anyone is interested.

View attachment 216097

This is interesting. How are you computing CAGR for the points on the graph? Is it the rate between data points or cumulative from some fixed point? Thanks.

 

[ajax]

This is interesting. How are you computing CAGR for the points on the graph? Is it the rate between data points or cumulative from some fixed point? Thanks.

Sorry, I should have specified. Each point represents the CAGR from 6/30/11 to that date.

 

[jhm]

To get a sense of variation from year to year in growth in shares outstanding, I computed annual change based on year ending 12/31.

2016 22.58%
2015 4.56%
2014 2.11%
2013 7.78%
2012 9.26%

CAGR 9.03%
Median 7.78%

So 2016 definitely looks like an outlier. So the median may be more representative of recent history.

What is tricky about the next ten years is that as cash flow improves, the expansion of shares will slow and eventually decline. We simply cannot look into the past to see how this will play out. We can guess at it.

But in situations like this I find it is good to step back and think more about the application. Out basic aim is to construct price targets one or two years out which are consistent with a longterm view of where the stock is headed. So I think we are trying to come up with a dilution assumption that fits expectation leading up to a self-funding state, not after it. When Tesla is generating substantial free cash flow, we and the whole market will know it. But for the next three to five years this is very unlikely. So in this more immediate context, I think 7% to 8% is fair. When we are FCF positive, this could drop below 2% and even go negative. Curiously one thing that could easily delay transition to FCF is moving into totally new and exciting markets. So the longterm value of Tesla may actually increase the longer it takes to achieve FCF. Own view is that the globe needs 13 to 20 TWh of battery production capacity, and this will not be realized before about 2032. If Tesla remains a leader in this space it will still be growing GF capacity at 40% annually through 2030. The rate of return on GF capacity needs to be greater than the growth rate to be fully self-funding. So it is plausible that Tesla could choose to raise capital for a really long time, and I view this as a positive outcome. Corporations need to return capital to shareholders when they run out of ways to reinvest it at a superior rate of return. Will that be Tesla at 2027? I hope not.

So back to the task at hand, how important is it to have a dilution assumption in line with immediate realities versus assumptions which reflect longer term possibilities? That is an awkward question because the basic view here is focused on an end state. So it is odd that Musk can give us a vision of where Tesla is headed, but his description does not make it clear how much dilution will be encountered along the way. So we must wrestle with this.

I really do appreciate all who have contributed to this discussion. I know that it at least has expanded my views.

 

[adiggs]

...
So back to the task at hand, how important is it to have a dilution assumption in line with immediate realities versus assumptions which reflect longer term possibilities? That is an awkward question because the basic view here is focused on an end state. So it is odd that Musk can give us a vision of where Tesla is headed, but his description does not make it clear how much dilution will be encountered along the way. So we must wrestle with this.

I really do appreciate all who have contributed to this discussion. I know that it at least has expanded my views.

I think the question has an easy answer - use the 8% number as close to the median and a conservative representation of what we expect to happen in the future. We know self funding is coming, but I see no reason to try and complicate this model today, with that information. When we see that 8% is noticeably wrong (a year or 2 goes by with no capital raise, so only employee comp dilution), then we can always update the model at that time.

It's a reasonable worst case assumption in my mind, keeps the model simpler.

 

[ggr]

Xerox Park

PARC -- Palo Alto Research Center

 

[kenliles]

PARC -- Palo Alto Research Center

yes thanks- typing fast on iPhone produces lots of spell-check issues-

maybe they should invest in some more research on that front!

 

[Paracelsus]

Self-funding will be a pretty important milestone............

Currently this is an open-question for many reasons, and I think the announcements of GF 3, 4, and 5 later this year are very critical to forecasting this. Tesla struggled (is still struggling?) to convince many large investors of the relevance of the GF 1 in the execution of its plan - particularly when trying to justify its cost. Now that many people get it, and now that the Buffalo GF 2 has set an example for what can be done with 'other people's money', future investment required to achieve similar growth may drop dramatically. I feel this is particularly true given the number of locations around the globe that have expressed competitive interest to become the home of the next GF in a manner that would suggest investment well beyond NV and NY. Thus, discussions of recent year's investment data to project future self-funding milestones may be particularly difficult........and also much too conservative. The world is now very hungry for what Tesla has to offer....both as a product and as an employer.

 

[jhm]

After sleeping on this, I am nearly persuaded that 8% dilution is a bit on the high side, but not by much. Moreover, it does not make a whole lot of difference to the LTPT. Here are some sensitivities:

Dilution LTPT
4% $5454
5% $4910
6% $4424
7% $3989
8% $3601
9% $3254
10% $2943
11% $2664
12% $2414

So the difference between is 7% and 8% is less than $400 in 2027, which probably should not make any difference to one's investment strategy over the next year or two. I will go ahead an post BFPTs for both below, but will likely use 8% dilution going forward. $3600 per share is a nice round number to have in mind.

But first I'd like to point out that dilution has nothing to do with the $1211B market cap. That follows from our other assumptions. Many have suggested basing this on Musk's target of $1T. I think this is just difference in rounding. To force the numbers to be equal we wind up assuming a slower growth rate than 50% for revenue, about 47%, or moving the LTPT date in from 12/31/2027 to about July 11, 2027. So let's just call it even, our outlook is that Tesla reaches $1T cap in 2027.

Now the BFPTs assuming $3600 LTPT
Percentile..Implied Discount..2017-02-24..2018-02-24..2019-02-24..2020-02-24..2022-12-31..2025-12-31
25% .. . 27.6% . . . $257 . . . $327 . . . $418 . . . $533 . . . $1,066 . . . $2,214
0% . . . 36.8% . . . $120 . . . $165 . . . $225 . . . $308 . . . . $752 . . . $1,925
5% . . . 31.9% . . . $178 . . . $235 . . . $310 . . . $409 . . . . $900 . . . $2,069
25% .. . 27.5% . . . $257 . . . $327 . . . $418 . . . $533 . . . $1,066 . . . $2,214
50% .. . 25.4% . . . $309 . . . $387 . . . $486 . . . $609 . . . $1,161 . . . $2,290
75% .. . 23.6% . . . $362 . . . $447 . . . $552 . . . $683 . . . $1,249 . . . $2,358
95% .. . 22.1% . . . $414 . . . $505 . . . $617 . . . $753 . . . $1,329 . . . $2,418
100% . . 20.9% . . . $458 . . . $554 . . . $670 . . . $810 . . . $1,392 . . . $2,463


BFPT assuming $4000 LTPT
Percentile..Implied Discount..2017-02-24..2018-02-24..2019-02-24..2020-02-24..2022-12-31..2025-12-31
24% .. . 28.8% . . . $257 . . . $331 . . . $426 . . . $548 . . . $1,128 . . . $2,412
0% . . . 37.7% . . . $124 . . . $171 . . . $235 . . . $324 . . . . $806 . . . $2,109
5% . . . 32.9% . . . $182 . . . $242 . . . $321 . . . $427 . . . . $962 . . . $2,263
25% .. . 28.7% . . . $259 . . . $333 . . . $428 . . . $551 . . . $1,132 . . . $2,415
50% .. . 26.4% . . . $313 . . . $396 . . . $501 . . . $633 . . . $1,237 . . . $2,502
75% .. . 24.6% . . . $368 . . . $458 . . . $571 . . . $711 . . . $1,331 . . . $2,577
95% .. . 23.0% . . . $422 . . . $519 . . . $639 . . . $786 . . . $1,419 . . . $2,643
100% . . 21.9% . . . $467 . . . $569 . . . $694 . . . $845 . . . $1,486 . . . $2,693

So given that the current price is about 2^8, I'd like to point out we are on course to hit 2^9 in 2020, 2^10 in 2022, and 2^11 in 2025. Here's to doubling!

 

[everman]

Dipping back in to the BFPT for an update. Glad to see current calculations. If I'm reading this right, we are estimating ~ $3,600/share in 2027 based on $1T cap and 8% dilution. I guess I'm slightly disappointed in such strong dilution, as BFPT/share was in the $6,000/share a year ago, was it not? I could be mis-remembering.

The recent ultra-bullish predictions on returns I've heard were from Ron Baron with his x4 by 2020, x3 by 2025 and x3 by 2030. From $260, that takes it to $9,360/share. Where is the disconnect?

 

[jhm]

With the latest bull run, I thought it would be good to check in with BFPT. $363/share is at the 64th percentile (over last 4 years history). So the current price is running a little rich, but it's running in the right direction.

Now the BFPTs assuming $3600 LTPT

Percentile..Implied Discount..2017-06-08..2018-06-08..2018-12-31..2020-12-31..2022-12-31..2025-12-31
64% . . . 24.2% . . . $363 . . . $451 . . . $510 . . . $788 . . . $1,216 . . . $2,333
0% . . . 31.1% . . . $206 . . . $270 . . . $314 . . . $541 . . . $929 . . . $2,095
5% . . . 29.5% . . . $235 . . . $304 . . . $352 . . . $590 . . . $989 . . . $2,148
25% . . . 27.2% . . . $282 . . . $359 . . . $411 . . . $666 . . . $1,079 . . . $2,224
50% . . . 25.4% . . . $330 . . . $414 . . . $470 . . . $740 . . . $1,163 . . . $2,292
75% . . . 23.6% . . . $384 . . . $475 . . . $535 . . . $818 . . . $1,249 . . . $2,358
95% . . . 22.1% . . . $438 . . . $535 . . . $599 . . . $892 . . . $1,329 . . . $2,418
100% . . . 20.9% . . . $483 . . . $585 . . . $651 . . . $952 . . . $1,392 . . . $2,463

From a momentum perspective, perhaps we could see as much as $438 in the near term. But keep in mind the downside risk. A year from now we could easily return to the 25th percentile, $359. So I'd be careful about buying above $384, the current 75th percentile. If one is going to make a momentum play, do it now. Otherwise, I would be inclined to wait for a pullback to $330, the current median.

Let me know what strategies you have in mind.

Good Luck!