Blind Faith Price Targets

[dalalsid]

Yeah, I get that. I just don't care to trade in options, though selling is better than buying.

Can we get an update on where we stand with the discounts in one of your BFPT tables, thanks!!

 

[jhm]

Here's our BFPT update for Oct 30, 2017. Current prices reflect bearish sentiment. I've got to be optimistic about the mood lifting once Tesla is cranking out Model 3 in goodly numbers. Buying under $336 is a really good price to accumulate.

LTPT $3600, EOY 2027, dilution 8%

Percentile    Discount    2017-10-27    2017-12-31    2018-10-27    2018-12-31    2019-12-31    2020-12-31
27.8%    26.75%     $322      $336      $408      $426      $540      $685
0%    31.10%     $228      $240      $299      $314      $412      $541
5%    29.48%     $259      $272      $336      $352      $455      $590
25%    27.11%     $313      $327      $398      $415      $528      $671
50%    25.38%     $360      $375      $451      $470      $589      $739
75%    23.67%     $414      $430      $512      $532      $657      $814
95%    22.05%     $473      $490      $578      $599      $730      $892
100%    20.92%     $520      $538      $629      $651      $787      $952

LTPT $5455, EOY 2027, dilution 4%

Percentile    Discount    2017-10-27    2017-12-31    2018-10-27    2018-12-31    2019-12-31    2020-12-31
22.1%    32.02%     $322      $339      $425      $447      $590      $780
0%    35.93%     $239      $253      $325      $344      $467      $635
5%    34.32%     $270      $285      $363      $383      $514      $691
25%    31.81%     $328      $344      $432      $454      $598      $789
50%    29.79%     $383      $402      $498      $521      $677      $879
75%    27.77%     $450      $470      $575      $600      $767      $981
95%    25.87%     $524      $546      $659      $687      $865      $1,089
100%    24.75%     $574      $597      $716      $745      $929      $1,159

LTPT $6750, EOY 2027, dilution 2% -- This one's for @ValueAnalyst!

Percentile    Discount    2017-10-27    2017-12-31    2018-10-27    2018-12-31    2019-12-31    2020-12-31
18.6%    34.82%     $322      $340      $434      $458      $618      $833
0%    38.58%     $244      $258      $337      $358      $496      $687
5%    36.90%     $276      $292      $378      $399      $547      $749
25%    34.32%     $335      $353      $449      $474      $636      $855
50%    32.15%     $395      $415      $522      $549      $725      $959
75%    29.87%     $472      $494      $612      $642      $833      $1,083
95%    27.90%     $551      $576      $705      $736      $942      $1,205
100%    26.73%     $605      $631      $767      $800      $1,014      $1,286

 

[ValueAnalyst]

Here's our BFPT update for Oct 30, 2017. Current prices reflect bearish sentiment. I've got to be optimistic about the mood lifting once Tesla is cranking out Model 3 in goodly numbers. Buying under $336 is a really good price to accumulate.

LTPT $3600, EOY 2027, dilution 8%

Percentile    Discount    2017-10-27    2017-12-31    2018-10-27    2018-12-31    2019-12-31    2020-12-31
27.8%    26.75%     $322      $336      $408      $426      $540      $685
0%    31.10%     $228      $240      $299      $314      $412      $541
5%    29.48%     $259      $272      $336      $352      $455      $590
25%    27.11%     $313      $327      $398      $415      $528      $671
50%    25.38%     $360      $375      $451      $470      $589      $739
75%    23.67%     $414      $430      $512      $532      $657      $814
95%    22.05%     $473      $490      $578      $599      $730      $892
100%    20.92%     $520      $538      $629      $651      $787      $952

LTPT $5455, EOY 2027, dilution 4%

Percentile    Discount    2017-10-27    2017-12-31    2018-10-27    2018-12-31    2019-12-31    2020-12-31
22.1%    32.02%     $322      $339      $425      $447      $590      $780
0%    35.93%     $239      $253      $325      $344      $467      $635
5%    34.32%     $270      $285      $363      $383      $514      $691
25%    31.81%     $328      $344      $432      $454      $598      $789
50%    29.79%     $383      $402      $498      $521      $677      $879
75%    27.77%     $450      $470      $575      $600      $767      $981
95%    25.87%     $524      $546      $659      $687      $865      $1,089
100%    24.75%     $574      $597      $716      $745      $929      $1,159

LTPT $6750, EOY 2027, dilution 2% -- This one's for @ValueAnalyst!

Percentile    Discount    2017-10-27    2017-12-31    2018-10-27    2018-12-31    2019-12-31    2020-12-31
18.6%    34.82%     $322      $340      $434      $458      $618      $833
0%    38.58%     $244      $258      $337      $358      $496      $687
5%    36.90%     $276      $292      $378      $399      $547      $749
25%    34.32%     $335      $353      $449      $474      $636      $855
50%    32.15%     $395      $415      $522      $549      $725      $959
75%    29.87%     $472      $494      $612      $642      $833      $1,083
95%    27.90%     $551      $576      $705      $736      $942      $1,205
100%    26.73%     $605      $631      $767      $800      $1,014      $1,286

Just FYI -

Apple's share count stopped growing when its revenue crossed $50B in 2009, which will be 2019 for Tesla.

Apple's share count started plunging once its revenue exceeded $150B in 2013, which will be 2021 for Tesla.

Tesla will be FCF+ in 2018 due to Semi deposits and Model 3 negative cash cycle, after which point its cash will snowball.

2019: Tesla implements a share buyback program to offset dilution from employee share awards. 2021: Tesla's share count starts declining.

In fact, Tesla's annualized share growth is already about to cross 2% down since March 31.

 

[jhm]

Just FYI -

Apple's share count stopped growing when its revenue crossed $50B in 2009, which will be 2019 for Tesla.

Apple's share count started plunging once its revenue exceeded $150B in 2013, which will be 2021 for Tesla.

Tesla will be FCF+ in 2018 due to Semi deposits and Model 3 negative cash cycle, after which point its cash will snowball.

2019: Tesla implements a share buyback program to offset dilution from employee share awards. 2021: Tesla's share count starts declining.

In fact, Tesla's annualized share growth is already about to cross 2% down since March 31.

I hope you're right that Tesla hits FCF+ next year. I'm also hoping that Semis are a hit. If so, we're gonna need more GF capacity, like 100GWh per 100k semi trucks. Also waiting to see how the Megachargers will be equipped. I suspect we'll see alot of stored solar, so another 10s of GWh per 100k semi trucks just to do power management for charging. So I'm all for FCF, but the growth opportunity could easily swamp cash flow if all goes well.

 

[ValueAnalyst]

I hope you're right that Tesla hits FCF+ next year. I'm also hoping that Semis are a hit. If so, we're gonna need more GF capacity, like 100GWh per 100k semi trucks. Also waiting to see how the Megachargers will be equipped. I suspect we'll see alot of stored solar, so another 10s of GWh per 100k semi trucks just to do power management for charging. So I'm all for FCF, but the growth opportunity could easily swamp cash flow if all goes well.

So adding 100 GWh capacity, even without any Alien Dreadnaught advancements, would cost less than $2B, once.

100k Semi's would bring in $25B in revenue and $7.5B in gross profits, per year.

I'm glad you raised that point, because the above comparison of incremental cash flows vs. cost illustrates my "snowball" point quite well.

 

[jhm]

So adding 100 GWh capacity, even without any Alien Dreadnaught advancements, would cost less than $2B, once.

100k Semi's would bring in $25B in revenue and $7.5B in gross profits, per year.

I'm glad you raised that point, because the above comparison of incremental cash flows vs. cost illustrates my "snowball" point quite well.

Hmm, I'd think that 100GWh capacity would require more than $5B and production facilities and tooling for semis would be several more billion. But it is not my aim here to exaggerate capital needs. Rather I'm very bullish about large scale investments that will give Tesla a huge most.

What I find bullish is FCF = $1. That is, Tesla is technically FCF positive, but it is making such heavy re-investment of cash flow that none of it is returned to investors, at least not until 95% of the auto and commercial vehicle markets have gone electric. Prior to that, returning capital to shareholders only delays the advent of sustainable transport.

But along the way there are very cool investments Tesla can make when they've got a little cash in their pocket. For example consider Megachargers. I've been trying to imagine a suitable scale for this. Suppose we have a station with 20 bays. I think we'd want about 40MW solar to produce 160MWh per day and 40MW / 160MWh. Also 40 MW of charging equipment and grid interconnection. So this easy gets to $100M in capital spending per Megacharger. Most of this investment will last for 20 years or more with very low opex. So the rapid build out of a Megacharger network could land Tesla an irresistible moat. Who's gonna touch 7c/kWh charging at MW speeds? If Tesla times this right they could lock in enormous market share of commercial vehicles for decades to come. What about scale? One 40 MW Megacharger would provide 200 charges of 800kWh or 400 miles range. Let's assume that Megachargers only provide 20% of the charging that the entire fleet of Tesla Semis consume. That is clients do 80% charging at their own facilities. Thus, Tesla needs one Megacharger per 1000 Semis sold. Very quickly we see need for 1000 40MW Megachargers just to support a fleet of 1 million trucks. Tesla easily needs to build out over $100B in Megachargers. This scale of investment would strike fear in the heart of most competitors. And this is exactly why it would serve as an unassailable moat for Tesla. Even though ChargePoint, utilities and oil companies may be attracted to providing commercial charging services, they will find it hard to compete with 7c/kWh. Moreover, where are they going to get stationary batteries at Tesla's cost to manage the peakiness of MW charging? I believe that initially 7c/kWh will be below cost for even for Tesla, and this makes it a ruthless play for market share. Tesla could own over half of the electric trucking market, which is ultimately a huge play in road freight. Imaging someday half of all road freight being hauled by a Tesla Semi and 10% of the fuel for road freight coming from Megachargers. This is enormous market power.

So the question is whether shareholders are better served by such a market power play or by returning capital while competitors are vying for market share. My preference obviously is to grab market share while the getting is good.

 

[ValueAnalyst]

Hmm, I'd think that 100GWh capacity would require more than $5B and production facilities and tooling for semis would be several more billion. But it is not my aim here to exaggerate capital needs. Rather I'm very bullish about large scale investments that will give Tesla a huge most.

I find your numbers too high, but even if we use your numbers, Tesla's annual return on capital invested would be 100%.

What I find bullish is FCF = $1. That is, Tesla is technically FCF positive, but it is making such heavy re-investment of cash flow that none of it is returned to investors, at least not until 95% of the auto and commercial vehicle markets have gone electric. Prior to that, returning capital to shareholders only delays the advent of sustainable transport.

Tesla is not "technically FCF positive." FCF is operating cash flow ("OCF") minus cap-ex. Tesla will be FCF+ in 2018, as increasing Semi deposits, as well as Model 3 negative cash cycle, together push OCF above cap-ex needs.

But along the way there are very cool investments Tesla can make when they've got a little cash in their pocket. For example consider Megachargers. I've been trying to imagine a suitable scale for this. Suppose we have a station with 20 bays. I think we'd want about 40MW solar to produce 160MWh per day and 40MW / 160MWh. Also 40 MW of charging equipment and grid interconnection. So this easy gets to $100M in capital spending per Megacharger. Most of this investment will last for 20 years or more with very low opex. So the rapid build out of a Megacharger network could land Tesla an irresistible moat. Who's gonna touch 7c/kWh charging at MW speeds? If Tesla times this right they could lock in enormous market share of commercial vehicles for decades to come. What about scale? One 40 MW Megacharger would provide 200 charges of 800kWh or 400 miles range. Let's assume that Megachargers only provide 20% of the charging that the entire fleet of Tesla Semis consume. That is clients do 80% charging at their own facilities. Thus, Tesla needs one Megacharger per 1000 Semis sold. Very quickly we see need for 1000 40MW Megachargers just to support a fleet of 1 million trucks. Tesla easily needs to build out over $100B in Megachargers. This scale of investment would strike fear in the heart of most competitors. And this is exactly why it would serve as an unassailable moat for Tesla. Even though ChargePoint, utilities and oil companies may be attracted to providing commercial charging services, they will find it hard to compete with 7c/kWh. Moreover, where are they going to get stationary batteries at Tesla's cost to manage the peakiness of MW charging? I believe that initially 7c/kWh will be below cost for even for Tesla, and this makes it a ruthless play for market share. Tesla could own over half of the electric trucking market, which is ultimately a huge play in road freight. Imaging someday half of all road freight being hauled by a Tesla Semi and 10% of the fuel for road freight coming from Megachargers. This is enormous market power.

Supercharger/Megacharger network will not cost Tesla more than $2B total in the next three years.

So the question is whether shareholders are better served by such a market power play or by returning capital while competitors are vying for market share. My preference obviously is to grab market share while the getting is good.

After 3k/w to 4k/w Model 3's, Tesla will no longer be limited by capital needs, but by talent, specifically manufacturing talent.

Tesla will start running into Apple's too-much-cash problem sooner than many expect, as soon as end-19. Stock buybacks are coming.

 

[adiggs]

Hmm, I'd think that 100GWh capacity would require more than $5B and production facilities and tooling for semis would be several more billion. But it is not my aim here to exaggerate capital needs. Rather I'm very bullish about large scale investments that will give Tesla a huge most.

What I find bullish is FCF = $1. That is, Tesla is technically FCF positive, but it is making such heavy re-investment of cash flow that none of it is returned to investors, at least not until 95% of the auto and commercial vehicle markets have gone electric. Prior to that, returning capital to shareholders only delays the advent of sustainable transport.

But along the way there are very cool investments Tesla can make when they've got a little cash in their pocket. For example consider Megachargers. I've been trying to imagine a suitable scale for this. Suppose we have a station with 20 bays. I think we'd want about 40MW solar to produce 160MWh per day and 40MW / 160MWh. Also 40 MW of charging equipment and grid interconnection. So this easy gets to $100M in capital spending per Megacharger. Most of this investment will last for 20 years or more with very low opex. So the rapid build out of a Megacharger network could land Tesla an irresistible moat. Who's gonna touch 7c/kWh charging at MW speeds? If Tesla times this right they could lock in enormous market share of commercial vehicles for decades to come. What about scale? One 40 MW Megacharger would provide 200 charges of 800kWh or 400 miles range. Let's assume that Megachargers only provide 20% of the charging that the entire fleet of Tesla Semis consume. That is clients do 80% charging at their own facilities. Thus, Tesla needs one Megacharger per 1000 Semis sold. Very quickly we see need for 1000 40MW Megachargers just to support a fleet of 1 million trucks. Tesla easily needs to build out over $100B in Megachargers. This scale of investment would strike fear in the heart of most competitors. And this is exactly why it would serve as an unassailable moat for Tesla. Even though ChargePoint, utilities and oil companies may be attracted to providing commercial charging services, they will find it hard to compete with 7c/kWh. Moreover, where are they going to get stationary batteries at Tesla's cost to manage the peakiness of MW charging? I believe that initially 7c/kWh will be below cost for even for Tesla, and this makes it a ruthless play for market share. Tesla could own over half of the electric trucking market, which is ultimately a huge play in road freight. Imaging someday half of all road freight being hauled by a Tesla Semi and 10% of the fuel for road freight coming from Megachargers. This is enormous market power.

So the question is whether shareholders are better served by such a market power play or by returning capital while competitors are vying for market share. My preference obviously is to grab market share while the getting is good.

I'm hoping that part of the $.07/kwh play by Tesla comes from Tesla's participation in the utility scale solar + solar manufacturing + storage battery markets. That Tesla / Elon has insight into reasonable expected prices to perform these installations in 3 years, and that what sounds like a really low price (by which I mean, the cost to do the installations in these form factors will be at or above $.07/kwh for Tesla) today, will in 3 years start sounding generally reasonable, and in 5-10 years when this infrastructure build is in really big volume buildout, $0.07/kwh is starting to sound expensive and that Tesla will need to lower that price.

I'm also hoping that we see a LOT of fleet operators decising to buy the equipment they need from Tesla to build and own/operate their own charging facilities that otherwise look an awful lot like one of these megachargers. These will be much better for the cash flow (to the degree that the fleet operators buy, install, and operate the equipment themselves). Heck - I hope we see Tesla Energy offering turnkey equipment and installation to the megacharger spec to the fleet operators that want it.

My worry, mostly derived from a lack of detailed information, is that this turns into a gargantuan capital investment (in a few years - not immediately) with lousy returns for 10 years 3-13 years from now. That's what I'll be watching as this develops.

The idea that Tesla is making a reasonable play at becoming a nationwide utility and possibly the US, and then maybe the world's, largest utility is .. intriguing to me. It would certainly be a mechanism by which Tesla can show everybody the power / cost / utility of renewable energy. Why build it for others, when you can build and operate it yourself?

 

[neroden]

I don't think there's any chance of free cash flow in the near future, due to the way it's calculated...

Free cash flow = operating cash flow - capital expenditures

I think it's perfectly obvious that for a long time Tesla will sink every available dollar into capital expenditures, and perhaps raise additional funds for more capital expenditures. This is obviously a good thing.

Tesla has positive funds from operations most years. Tesla has already had positive operating cash flow before, and the difference between the two is mainly about receivables/payables timing, which should be improving now. So both of those metrics will look good very soon. I think the key number to watch is actually *GAAP profit*, which I also think will happen soon.

 

[ValueAnalyst]

I don't think there's any chance of free cash flow in the near future, due to the way it's calculated...

Free cash flow = operating cash flow - capital expenditures

I think it's perfectly obvious that for a long time Tesla will sink every available dollar into capital expenditures, and perhaps raise additional funds for more capital expenditures. This is obviously a good thing.

Tesla has positive funds from operations most years. Tesla has already had positive operating cash flow before, and the difference between the two is mainly about receivables/payables timing, which should be improving now. So both of those metrics will look good very soon. I think the key number to watch is actually *GAAP profit*, which I also think will happen soon.

Mathematically one of two things would need to happen for Tesla to NOT be FCF+ in 2019:

1. Tesla starts buying tooling and equipment for its subsequent Gigafactories in 2019 (which obviously is not possible since that's a Year 3/4/5 spend); or
2. Model 3 does not achieve 25% gross margin AND does not have a negative cash cycle (which are both management guidance), which I guess wouldn't be the first time the company fell short of its management guidance.

Incremental super/megacharger, sale/service center, or OpEx spend should be negligible given management guidance for Model 3.

 

[generalenthu]

Mathematically one of two things would need to happen for Tesla to NOT be FCF+ in 2019:

1. Tesla starts buying tooling and equipment for its subsequent Gigafactories in 2019 (which obviously is not possible since that's a Year 3/4/5 spend); or
2. Model 3 does not achieve 25% gross margin AND does not have a negative cash cycle (which are both management guidance), which I guess wouldn't be the first time the company fell short of its management guidance.

Incremental super/megacharger, sale/service center, or OpEx spend should be negligible given management guidance for Model 3.

What makes you think the lag between breaking ground to investing in tooling will be 3 years for subsequent gigafactories if gf is a product.

 

[ValueAnalyst]

What makes you think the lag between breaking ground to investing in tooling will be 3 years for subsequent gigafactories if gf is a product.

Nothing other than GF1 timeline, so not a well-supported thought, other than the fact that it would have to be one year for GF3,4,5,6 if breaking ground in mid-18 for FCF+ to not play out. 1 year vs. 3 to 4 years for GF1.

If management guidance is correct, and that’s a big if unfortunately, then Model 3 will be printing $6B+ annualized gross profits by end-18. Would need to be year 3 of GF3 and GF4, at a minimum, to spend all of that cash on top of some incremental investment in OpEx. Ain’t happening.

2018 is year 1. Capex won’t see step change until end-19 at the earliest, probably 2020.

 

[Hogfighter]

I don't think there's any chance of free cash flow in the near future, due to the way it's calculated...

Free cash flow = operating cash flow - capital expenditures

I think it's perfectly obvious that for a long time Tesla will sink every available dollar into capital expenditures, and perhaps raise additional funds for more capital expenditures. This is obviously a good thing.

Tesla has positive funds from operations most years. Tesla has already had positive operating cash flow before, and the difference between the two is mainly about receivables/payables timing, which should be improving now. So both of those metrics will look good very soon. I think the key number to watch is actually *GAAP profit*, which I also think will happen soon.

And this is precisely why the negative comparison between AMZN and TSLA isn't fair. Tesla's products require ridiculous amounts of CapEx. Analysts pound all over TSLA, saying that at least AMZN was always FCF positive for years while growing. SG&A costs are significant for TSLA as well, building out the infrastructure to support more and more products. At any time, Tesla could dial back the growth and churn out decent profits....but I know of no investor that would want that to occur.

AMZN traded profits for massive growth. TSLA is doing the same.

 

[Manton]

After 3k/w to 4k/w Model 3's, Tesla will no longer be limited by capital needs, but by talent, specifically manufacturing talent.

Tesla will start running into Apple's too-much-cash problem sooner than many expect, as soon as end-19. Stock buybacks are coming.

EM has mentioned that it would be a lot easier to run Tesla as a private company, might he be working to make that happen again? How would this affect the SP?

 

[kbM3]

@jhm I would love to see how effective bfpt is as an investment strategy over time. What about running hypothetical investments of two investors over time?

Both start today with $20k and have $1k per month to invest.

Investor 1 is total buy and hold (leaves in $20k and invests $1k/month as money is available).

Investor 2 jumps in and out based on bfpt.

Assume fractional share purchase capability and no tax consequences for simplicity maybe.

Would you be interested in this simulation?

 

[BornToFly]

@jhm
Assume fractional share purchase capability and no tax consequences for simplicity maybe.

Would you be interested in this simulation?

I don't see how you can leave out taxes. With the government stealing about 40% of all my short term gains, that has major implications on attempting to jump in and out. Even my LEAPS I try to hold for a year before selling.

 

[kbM3]

I don't see how you can leave out taxes. With the government stealing about 40% of all my short term gains, that has major implications on attempting to jump in and out. Even my LEAPS I try to hold for a year before selling.

I would be ok either way. Just trying to make the simulation easier.

It would still be somewhat valid in an IRA situation.

Another consideration is what would investor 2’s money be doing when not in Tesla? Maybe in a hypothetical investment earning one percent per month? Or just invested in the NASDAQ index fund?

This doesn’t apply to me at all as I am 130% invested and will not be having additional funds to invest. I just find it very interesting.

I also think it would be nice to set up the investment rules for investor 2 in advance.

 

[jhm]

@jhm I would love to see how effective bfpt is as an investment strategy over time. What about running hypothetical investments of two investors over time?

Both start today with $20k and have $1k per month to invest.

Investor 1 is total buy and hold (leaves in $20k and invests $1k/month as money is available).

Investor 2 jumps in and out based on bfpt.

Assume fractional share purchase capability and no tax consequences for simplicity maybe.

Would you be interested in this simulation?

Hmm, we would need to define some trading rules based on BFPT. I haven't actually formulated such a thing.

The basic idea is to accumulate when implied discount is high, but maybe lighten up when discount is low. So one would need to set some thresholds, say buy in the most heavily discounted 20% and sell in the most lightly discounted 10%. This would biased toward accumulation, buying more frequently than selling.

Any thoughts about how to set a good rule?

We must have the caveat that real investment decisions need to be more than following any rule. Many other factors are involved, for example tax implications. But for mere backtesting, a simple rule may be instructive.

 

[kbM3]

Hmm, we would need to define some trading rules based on BFPT. I haven't actually formulated such a thing.

The basic idea is to accumulate when implied discount is high, but maybe lighten up when discount is low. So one would need to set some thresholds, say buy in the most heavily discounted 20% and sell in the most lightly discounted 10%. This would biased toward accumulation, buying more frequently than selling.

Any thoughts about how to set a good rule?

We must have the caveat that real investment decisions need to be more than following any rule. Many other factors are involved, for example tax implications. But for mere backtesting, a simple rule may be instructive.

Taxes really complicate the simulation and the rules.

Having to track lots, because of long term vs. short term tax rates, Ignoring state tax. In which tax bracket is investor 2 not counting this investment...

If you do ignore tax, a rule could be simply based on:
1). Either a fixed time period for trades or triggers for trades based on movement within the percentiles.
2) Size of the trade based on current allocation and percentile.

Even so, an algorithm may be complex to define.

I would personally be ok with you just making decisions as you would if it were your money (maybe with feedback?)

May end up being too big of an effort, but I would sure find it interesting!

 

[SBenson]

@jhm Can you please post an update to the tables? Thanks