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Yeah, we can run this baby in reverse!
Percentile..Implied Discount..2013-01-01..2014-01-01..2015-01-01..2016-01-01..2017-01-01..2018-01-01
64% . . . 24.2% . . . $139 . . . $172 . . . $214 . . . $266 . . . $331 . . . $411
0% . . . 31.1% . . . $62 . . . $81 . . . $106 . . . $139 . . . $183 . . . $240
5% . . . 29.5% . . . $75 . . . $97 . . . $125 . . . $162 . . . $210 . . . $272
25% . . . 27.2% . . . $97 . . . $123 . . . $157 . . . $200 . . . $254 . . . $323
50% . . . 25.4% . . . $121 . . . $152 . . . $190 . . . $239 . . . $300 . . . $376
75% . . . 23.6% . . . $150 . . . $186 . . . $229 . . . $284 . . . $351 . . . $433
95% . . . 22.1% . . . $181 . . . $221 . . . $270 . . . $329 . . . $402 . . . $491
100% . . . 20.9% . . . $208 . . . $252 . . . $304 . . . $368 . . . $445 . . . $538
So we are way past the max projection in prior years. Note that this is a reverse projection based on the most recent four-year distribution of implied discounts. So it need not be sensitive to actual max prices at the time. An actual back test would not use the current distribution.
@jhm, about a week before the March 31, 2016 Model 3 reveal, I suggested in a post in this thread that a linear SP rise may not be the right model but rather that there may be a second inflection point in the SP after the Model 3 launch just as there was around the Model S launch.
The basic idea is that as with the successful Model S launch, Tesla's ability to hit something like the long-term price targets become more likely (or lower risk, if you prefer), and that the market would not "allow" the very high annual gains that could be achieved because the nature of the risks changed in a fundamental way.
If that's correct, then the SP can and will run far above the median and still be "safe" because the LTPT or something like it is much less "pie in the sky" and a step closer to something like simple blocking and tackling. I am not sure if we are at that stage yet, but I still believe something like this is likely to happen after a successful Model 3 launch. I explain my theory in the post below, as well as posts 166 and 168 in this thread. If the theory is right, we should see the SP gap up sometime before 2020, just as we did in 2010-2013. Predicting exact timing is difficult, but we may be in the early stages of it now, as investors are starting to realize what the Model 3 means for the long-term prospects of TSLA and starting to price in the future to a much greater extent than before.
I explain the theory in more detail in the post below and posts 166 and 168 above.
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Yes, I think we are seeing that shift right now. The challenge is how to know when we are getting ahead of ourselves. Median Implied Discount very well will decline over time as Tesla becomes a more established company. Let's look at annual median IP for recent years.
YearEnding . . . MedianImpliedDiscount
2017-06-09 . . . 27.0%
2016-12-09 . . . 25.8%
2016-06-09 . . . 24.4%
2015-12-09 . . . 23.7%
2015-06-09 . . . 23.8%
2014-12-09 . . . 24.0%
2014-06-09 . . . 27.9%
2013-12-09 . . . 35.5%
2013-06-10 . . . 36.3%
So through much of the sideways market of the last three years the annual median has remained around 24%. But what is worrisome is that in the last year the median fell to 27% as we saw prices that really pushed the lower end of our price targets. For example in Nov 14, the price closed at $181.45 with an IP of 30.8% even as the annual median was at 25.6%. This was a spectacularly good time to buy, but it was so far off the charts in terms of BFPT that it was very hard to believe.
So lets assume that every three or so years, Tesla goes through a major valuation shift. Early on in that cycle, the median ID can decline as it had in 2014. But this can give us a false sense of confidence. At the end of the cycle in 2016, median IP was expanding again to 26%. Personally, I did a lot more accumulation in 2014 and 2015 than in 2016. I was lured in by a false sense that I knew how deep IP could go and thus missed out on some of the best buys in 2016.
I was just using 1 or 2 years of history to train the BFPT. This was not enough to see the extremes that would be encountered over a 3 year cycle. So now I am using 4 years. Perhaps I should be looking back 5 years to get a better feel for the transition in 2013. In any case, I am now taking a longer view historically and hoping that will stabilize things. I don't want to get faked out thinking that the ID distribution has fundamentally shifted when it is just cycling through a much longer cycle.
So with respect to the last 4 years and a LTPT of $3600 in 2027, our current price of $376 is at the 70th percentile with ID at 23.8%. My 12 month median BFPT is $414, while the first quartile is $359 and third quartile $475. So this could still be quite a good price. We've got both strong upside and moderate downside. But I'd be careful about buying above $385. There seems to be a limited window to score some shares at an okay price, unless we get a substantial pullback.
Now the current price is at 23.8% ID. Where do we think median ID will be 2 or 3 years out? Yeah, it could decline from the current 4-year median of 25.4%, but maybe 23.8% is a fair bet where this is going. If so, then we are at a prospective median price already. So this kind of thinking just let's us persuade ourselves that the current price is fair. But what that means is that about half the time over the next few years, we will have opportunities to buy at an even bigger implied discount than the present price. Even if we believe that the median going forward is just 23% or 22%, we will still have ample opportunities ahead to buy at a deeper discount than the present price. But if the median going forward remains close to 25.4%, we will have much better discounts ahead. So the question is how much dry powder do I want hold for better prices versus locking in what appears to be a fair price. It is a personal decision, of course.
Even as a write this, the price has fallen from $376 to $369. So other buyers must be keeping their powder dry as well.
YearEnding . . . MedianImpliedDiscount
2017-06-09 . . . 27.0%
2016-12-09 . . . 25.8%
2016-06-09 . . . 24.4%
2015-12-09 . . . 23.7%
2015-06-09 . . . 23.8%
2014-12-09 . . . 24.0%
2014-06-09 . . . 27.9%
2013-12-09 . . . 35.5%
2013-06-10 . . . 36.3%
So through much of the sideways market of the last three years the annual median has remained around 24%. But what is worrisome is that in the last year the median fell to 27% as we saw prices that really pushed the lower end of our price targets. For example in Nov 14, the price closed at $181.45 with an IP of 30.8% even as the annual median was at 25.6%. This was a spectacularly good time to buy, but it was so far off the charts in terms of BFPT that it was very hard to believe.
So lets assume that every three or so years, Tesla goes through a major valuation shift. Early on in that cycle, the median ID can decline as it had in 2014. But this can give us a false sense of confidence. At the end of the cycle in 2016, median IP was expanding again to 26%. Personally, I did a lot more accumulation in 2014 and 2015 than in 2016. I was lured in by a false sense that I knew how deep IP could go and thus missed out on some of the best buys in 2016.
I was just using 1 or 2 years of history to train the BFPT. This was not enough to see the extremes that would be encountered over a 3 year cycle. So now I am using 4 years. Perhaps I should be looking back 5 years to get a better feel for the transition in 2013. In any case, I am now taking a longer view historically and hoping that will stabilize things. I don't want to get faked out thinking that the ID distribution has fundamentally shifted when it is just cycling through a much longer cycle.
So with respect to the last 4 years and a LTPT of $3600 in 2027, our current price of $376 is at the 70th percentile with ID at 23.8%. My 12 month median BFPT is $414, while the first quartile is $359 and third quartile $475. So this could still be quite a good price. We've got both strong upside and moderate downside. But I'd be careful about buying above $385. There seems to be a limited window to score some shares at an okay price, unless we get a substantial pullback.
Now the current price is at 23.8% ID. Where do we think median ID will be 2 or 3 years out? Yeah, it could decline from the current 4-year median of 25.4%, but maybe 23.8% is a fair bet where this is going. If so, then we are at a prospective median price already. So this kind of thinking just let's us persuade ourselves that the current price is fair. But what that means is that about half the time over the next few years, we will have opportunities to buy at an even bigger implied discount than the present price. Even if we believe that the median going forward is just 23% or 22%, we will still have ample opportunities ahead to buy at a deeper discount than the present price. But if the median going forward remains close to 25.4%, we will have much better discounts ahead. So the question is how much dry powder do I want hold for better prices versus locking in what appears to be a fair price. It is a personal decision, of course.
Even as a write this, the price has fallen from $376 to $369. So other buyers must be keeping their powder dry as well.
All good points. Predicting the future is always a dangerous business and having some conservatism built into an otherwise optimistic ("blind faith") model makes sense.
Having said that, if Tesla executes well over the next three years, it would not surprise me to see the ID drop to 15-20% by 2020 (or the LTPT move up, or both) as Tesla becomes recognized as the leading player in the "new" automotive industry dominated by EVs.
At that point, the path forward should be more about execution than proving the viability of the EV market. Also, by 2020 Tesla should have released and be receiving significant revenue from the Tesla Semi, Solar Roof, TE, and TN, (hopefully) proving the viability of these new markets or market niches as well as Tesla's leading place in each of them. This would be akin to shifting from the pre-Roadster days to the post-Model S or even post-Model 3 eras in these product lines. In other words, these parts of the business, if successful, should shift in market perception from start up mode where a discount rate of 40% may be reasonable to a rapidly growing but established player where a 15-20% discount rate seems more realistic.
I have been convinced enough that there is a reasonable probability of a gap up by 2020 that I essentially maxed out in 2016 on what I am comfortable having in a single stock, although I am positioned to weather potential major downturns due to macros or otherwise so if it takes longer I will be fine. To me the risk of missing out on the rise is greater than the potential benefit of buying on dips. Of course, that could very easily turn out to be a bad bet -- TSLA is very volatile and sentiment can change at the drop of a hat and stay negative for long periods of time, as we saw last year.
ValueAnalyst
Closed
Given Model S and Model X margins moving towards 30%, Elon's comments around Model 3 gross margin, CFO's comments around 95% of opex not being related to Model S or Model X, the software-like 80%+ margins that come with Autopilot in 2017 and Tesla Network in 2018, and improved access to non-dilutive debt capital with Model 3 ramp-up, I expect Tesla to become "self-funding" (incl. non-dilutive debt) in 2017.
Your model of 4-12% dilution per year means several hundreds of billions of dollars of equity capital alone.
If we assume non-dilutive debt capital as well, what will Tesla do with $1 TRILLION of cash on top of internal cash flow?!?!
Even if Tesla built all 100 Gigafactories, that would at maximum be $500 Billion assuming no improvement in Gigafactory cost efficiencies.
ValueAnalyst
Closed
Agreed 110%.
I like the idea of investing vs. market sentiment, but this methodology just doesn't hold water.
I hope you saw the care we put into arriving at 8% dilution on empirical grounds. It is not all capital raises, but employee compensation is also a big part.
Self-funding is a curious thing. It depends not only on how much cash flow lines of business can generate but management's appetite for growth.
Suppose for example Tesla was generating enough cash to self-fund and grow at 40% pa. Super. Now Musk steps up and says Tesla should grow at 50%. Ok, some extenal funding will be required. Next year, Tesla is self-funding at 50%, but Musk sees other opportunities to grow at 60%. So again some external financing is required. You can see where this is headed.
No matter what level of growth Tesla can self-fund, Musk will not lack for new ideas or ambition. So as long as Musk is CEO, I don't think Tesla will be completely self-funding, but it will be generating tremendous cash. This is exactly the kind of relentless ambition needed to become a $1T company.
Another thing to keep in mind about Musk is that he is very opportunistic. If an opportunity proves bigger than expected, he'll seize on more capital. This is why we are poised for step growth with the Model 3. Had M3 reservations come in at 100k, we would not be expanding capacity so fast. Thus, as a shareholder I do not view capital raises or share dilution as a negative. It is an exciting response to opportunities as they emerge. So if shares are growing 8% per year, I'm delighted because there is so much to go for. But this opportunism is almost impossible to model from the ground up.
So ultimately what is this BFPT model about? It is about trying to connect visionary entrepreneurship with how that is received by the market. LTPT represents the wealth Musk intends to create long term. We don't know exactly what path that will take, but we do know that Musk is visionary, driven and highly adaptable. He is confident that he can drive 50% revenue growth every year, maybe more. So that's the nominal revenue trajectory. Does the market believe it? More or less. And so we trace ID to see how the market level of disbelief fluctuates over time. We are modeling faith in a vision.
ValueAnalyst
Closed
I'm sorry, but I think you're thinking about this completely backwards. It's important to first project out the growth of the company then calculate if they need outside capital, and in what form, through an integrated discounted cash flow analysis.
You're looking at historical dilution and projecting it out then saying "oh, he'll find a way to spend it profitably."
I'm going to take it to the extreme to make my point:
When the company is worth $1T, it will likely be generating $50B+ of each year. On top of that, you're assuming another $80B of cash flow?
Can you please explain what you expect Elon to do with $130B of cash plus endless outside debt capital available to mega-cap companies after having already spent several hundred billions at that point?
I'm not saying that he can't; clearly Elon thinks of growth opportunities nobody ever has.
But if you will assume 8% annual dilution, you need to assume 200% profitable revenue growth per year for ten years at a minimum to justify that level of cap-ex.
So assuming current level of 50% revenue growth with 8% annual dilution is unreasonably conservative, and that's an understatement.
How much over the next 40 years will 50 big freaking rockets cost? Much less the next 500-1,000 years to terraform Mars?
You did? Watch the video with Mars as a water world like Terra/earth?
People complain money managers only look at the next quarter results. Focus on the next quarter millennium results, instead. Think of the folks who built cathedrals in Europe that took hundreds of years,
if neural mesh works, some alive now, would have a consciousness aware far in the future, plan a really long view
ValueAnalyst
Closed
FWIW, I estimate that the company is worth $1T+ today with an appropriate discount rate for next eight years of growth.
dc_h
Active Member
An irony of financial modeling is that if TSLA can self fund 10% annual growth, that is what they should do. If they can self fund at 50% they should raise as much as they can. The point being a company that can self fund a capital intensive industry at 50% is better spent than a 10% growth company. Money wants to be spent effectively, so as long as they can generate high margins it will be hard to keep from going back to the market for more money.
My heart hates to hear about a cap raise, but my brain says it's a no brainer.
My heart hates to hear about a cap raise, but my brain says it's a no brainer.
Right, I am intentionally thinking about this backwards. And I believe it is valuable to do so. You may be steeped in DCF methods, and that is fine. That approach required one to be able to elaborate all cash flows in advance and know how much discount it. But what is missing is whether the rest of market sees those same cash flow, believes them and willing to discount them the way the analyst does. The big disconnect here is that most DCF analysts do not calibrate their models to the market. The straightforward way to do this is, given your modeled cash flows, back into the discount rates that that make NPV equal historical or current stock prices. This is the sort of calibration that finance quants do routinely for just about all sophisticated finance models. For example, if you want to use Black-Scholes to model an option, you back into the volatility level that matches current prices of the option in question. Through reconciliation you obtain implied volatity.
Now carry that same sort of thinking to your DCF. Don't assume you know what the discount should be. It's not your job to tell the market what price to put on uncertainty. Rather, let market prices tell you what the implied discounts are. You can calibrate your model to daily prices and get a daily read on implied discounts with respect to your assumed cash flows.
This will reveal how much the market believes your vision for cash flow. Even if your cash flows are spot on, the market can discount it more severely than you do and persist lower prices than you think a stock is worth.
ValueAnalyst
Closed
I'm okay with market discounting cash flows more than I do, as they will work itself out over time.
The biggest risk with your methodology is waiting for a lower entry point and market suddenly agreeing with me that future cash flows should be discounted at a much lower rate. Correct me if I'm wrong, but if the stock goes up to $450 here, then you'll be lowering your weighting on TSLA, right?
All it would take for the short squeeze scenario to play out is market realizing:
1. Gigafactory-scale is a requirement for anyone looking to compete with Tesla; and
2. BEV is a requirement as cutting ICE costs to BEV levels is not possible.
As soon as the market realizes this, which I believe is as soon as few weeks and as late as a few months, then short squeeze occurs.
If you're not in the stock big time at that point, waiting for a 5-10-20% lower price, then you miss out on 10-20x upside.
What am I missing here?
LargeHamCollider
Battery cells != scalable
1. I think it's a little more complicated than that.
2. It looks like you're projecting into JHM's brain a weighting of BFPT that doesn't exist. BFPT is just one tool that has flaws like other tools, it is not on oracle or a crystal ball, and no one is viewing it as such.
jhm, I wouldn't be surprised if you are developing something of some utility here. That said, to me, it sounds like you are describing precisely the opposite of Benjamin Graham's "Mr. Market" analogy, which Warren Buffett refers to frequently. The basic idea is that the market swings from irrationally undervaluing to irrationally overvaluing companies, and that the investors opportunity is to find companies he/she can confidently value so as to trade on Mr Markets crazy good offers to us to buy or sell that arise over time. ie, a skilled investor makes money precisely because of their ability to asses the value of a company (current discounted value of future earnings) better than the market.
fwiw, not surprising Buffett popularized this "Mr. Market" concept as Graham was his mentor, and that metaphor was a highlight of one of the two chapters of a Graham book that Buffett has described as the bedrock of his 60 years of investing (just those two chapters!).
For dilution purposes you should also consider M&A.
From my memory, Tesla bought SolarCity and Grohman. SolarCity in turn bought Zep, Silevo and another marketing firm I forget.
When Tesla becomes 200bil and Panasonic retains its lead in batteries, it may very well buy Panasonic. This is just one example.
Will Tesla buy boring company eventually? How about hyperloop? They are in the same domain after all - concerning transportation.
Who knows what else Musk may buy.
Dilution comes from
- Employee stock and options. Don't forget Musk has very big payouts, maybe other senior managers too
- M&A
- Secondary issuances
- Existing convertibles converting
- Any others ?
So be careful in your models with assumptions on this. I personally don't mind putting a high number like 8% on this, at least until it really goes down below that for a few years.
If you are a working person with a paycheck you can mitigate this to some degree by buying additional stock each year. But of course after a point you can't. That would be a good problem
From my memory, Tesla bought SolarCity and Grohman. SolarCity in turn bought Zep, Silevo and another marketing firm I forget.
When Tesla becomes 200bil and Panasonic retains its lead in batteries, it may very well buy Panasonic. This is just one example.
Will Tesla buy boring company eventually? How about hyperloop? They are in the same domain after all - concerning transportation.
Who knows what else Musk may buy.
Dilution comes from
- Employee stock and options. Don't forget Musk has very big payouts, maybe other senior managers too
- M&A
- Secondary issuances
- Existing convertibles converting
- Any others ?
So be careful in your models with assumptions on this. I personally don't mind putting a high number like 8% on this, at least until it really goes down below that for a few years.
If you are a working person with a paycheck you can mitigate this to some degree by buying additional stock each year. But of course after a point you can't. That would be a good problem
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I think what you're missing is that I've used this tool to accumulate a huge position (bigger than my home) buying at times when the price was in the lowest 25%. I am very much wired as a buy and hold investor. So if the price went to $450 next week, I'd likely just keep holding. I would mentally brace myself for a 20% to 30% pullback and seize on more shares if that were to happen. But I don't need for that to happen. Even if I never buy another share, I'm set to retire 10 or so years from now.
If I were to sell shares at $450, then as you point out I would expose myself to the risk of not being able to repurchase my shares at a lower price. So I would have to use more than just BFPT to persuade myself that that was a safe bet.
Honestly, I really do not like short squeezes. They can easily push the stock up to unsustainably high prices, then it just collapses back. What I do like is when demand for the stock goes up because the company is doing truly great things.
In a way, the shorts do a great service to buy and hold investors. In the short run, they can drive down prices and provide investors with lots of great opportunities to accumulate. One way to think of first quartile of BFPT is that over the last 4 years one has been able to accumulate at higher discount one quarter of the time. If you're not buying at those prices, you're really missing out.
But what if you're new to Tesla? In the past few days I pointed out when the price was in the 64th percentile, and encouraged people to buy and not wait for the price to go up. Yesterday, when the price was around $376, it was in the 70% percentile. This was still a good price to buy. I pointed out that the12 month first quartile BFPT was $359, so one only has moderate downside. Then, the stock price shot down to $359. I was not predicting it would, but hey that is a great price to buy at. Now through all of this I have been cautioning about buying above $384, not because I am a bear, but because it is much better to buy now while prices are lower.
The complicating issue here is that we have a very strong upward trend right now. This is what creates the urgency to buy now and not wait for prices to climb higher. If we were in a downward trend, I would not need to tell people to wait for lower prices. But suppose we drop into the lower quartile. At that point I'm telling people don't be afraid to buy. These are really good prices. The toughest buy is when we are at the 0th percentile. All hope is gone at that point, but damn is it a good price. My brother-in-law bought below $180 last fall. You don't need to wait for a trend when discounts are that deep.
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