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Blind Faith Price Targets

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

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  1. ken830

    ken830 Model S 85, Model 3 Performance

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    I have very mixed feelings about the SP today. On one hand, I'm ecstatic that maybe the masses have finally woken. But I was hoping to take advantage of lower SP for a much longer period of time to continue share accumulation. I don't nearly have enough.
     
  2. jhm

    jhm Well-Known Member

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    It may be time for us to rethink the LTPTs. Ludicrous at $7250 by Jan 2028 was the top end of our three targets. Apparently, the market is starting to believe that substantially higher targets are possible,

    I did start a separate thread on expectations for 2025. The survey shows that most think $1T market cap or $5000/share is reasonable. We also see in the previous post that the Ludicrous target at the high end maps to just $4500 by the end of 2025. So this suggest that the Ludicrous target is more conservative than what a typical TMC bull believes.

    So I think we should set new targets for 2030.

    I also have some new thoughts about a suitable discount rate for Tesla. The question of discount comes down to a comparison with alternative investments. S&P 500 is not a good benchmark for Tesla, specifically because most stocks included in the that index are not high growth, disruptive innovators. CAPM tries to solve this problem by asking would your rather invest in this stock or and average stock in this index. It makes an adjustment for beta, but this is dubious adjustment for a hyper-growth stock that at actually gets a beta estimate near 1. This all boils down to comparing Tesla to stocks like Johnson & Johnson or Exxon Mobil. What is needed is an benchmark index that is composed of high growth, disruptive innovators. I would rather compare Tesla to the likes of SolarEdge or Square.

    Here is what I would propose: ARK Investment Disruptive Innovation Fund (ARKK). Tesla is the largest component of this fund. The fund seeks out investments like Tesla. It focuses on a five-year horizon which is long enough for many visionary IPO'ed companies to make serious strides. ARK funds are rather popular with Tesla shareholders. I believe this is because the investor orientation of Cathie and her teams is such a good match with many Tesla bulls. So in fact, many Tesla shareholders find themselves wondering whether they should invest a little more in Tesla or in one of the ARK funds. So I think this makes ARKK a very good benchmark for investing in Tesla.

    So consider that over the last 5 years ARKK has had an annual return of 30%. Because of the last 3 months of extraordinary trading, Tesla has beat ARKK over the last 5 years, but for most of those years it was a toss up which one would do better. Additionally, ARKK is not quite as volatile as Tesla. Let's make the comparison clear.

    Over the next 5 years would you rather be invested in

    TSLA with a price target of $5000/sh in 2025
    OR
    ARKK with a stable 5-year 30%/y growth track record?

    Well, if you discount $5000 by 30% for 5 years, you get $1347 (=$5000/1.3^5). So Tesla at price below $1347 would favor buying TSLA over ARKK. At higher prices, ARKK could be the better choice.

    I think this comparison goes a long way toward explaining why, say $2009/sh, a 20% implied discount on a target of $5000 five years out, is unsustainable. At this price level, many Tesla bulls will be quietly shifting their investments to ARK funds. When your outlook for Tesla is just 20% expected annual appreciation, you've got a lot more attractive alternatives that can give you an expected 30% return.

    Discounting is always about alternative investments.

    So I'm starting to work on some ideas about how track Tesla's performance against ARKK. More to come.
     
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  3. hershey101

    hershey101 Member

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    @jhm I'd be a bit weary of modeling things with the high flying estimates that ARK produces.
    What's a more realistic explaination of what's happening is that the market is realizing that there is no competition, the execution risk is non existent and that 4m cars or 10m cars (2024 or 2028) is a very real possibility.

    It could be that the market is pricing Tesla at the same discount as FAANG for their core business... Which would imply discounts closer to 10% of 2024 estimates... Something along those lines is what FAANG, Nvidia etc are priced at.

    What if we reprice Tesla with this in mind?
    40% yearly growth, 35% gross margins, 10% net margins, $40k ASP... If we assume 500k cars for 2020, that results in 2M in 2024, and $8B in earnings.... 40x P/E = 320B valuation. If we take this as a near certainty (pricing for perfection), and apply a 10% discount (the risk free rate is 0% and there's not a lot of other places for the trillions printed by centeral banks globally to go), you get a 7% return at 250B market cap today... Anything above this is premium investors are willing to pay for other future potential growth opportunities....


    That's a stretch in valuation, but the only way to make this work.

    Will post more possibilities later when I'm not on my phone. Suffice it to say, one bad news article and we come back to the ground fast!
     
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  4. hershey101

    hershey101 Member

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    Has anyone done a proper valuation on the 4 biggest holdings ARKK has besides TSLA? $SQ, $NVTA, $ROKU all seemed to be highly priced right now... FAANG as well... If so, either we chop sideways for many years not getting that 20%+ growth... Or, we are overdue for a big correction.
     
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  5. jhm

    jhm Well-Known Member

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    Why would I invest in Tesla if I expected a mere 7% return? ARKK ETF grows substantially faster than that. Even NASDAQ ETF QQQ has grown 18%/y over the last five years.
     
  6. Dr. J

    Dr. J Active Member

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    Don't you think average selling price will decline in the near future, as it apparently has been in the recent past? Of course, I think gross margins are also increasing slowly. And then there's the storage business. And solar. And possibly increased software revenues.

    There's also the possibility of revolutionary (not evolutionary) battery technology, which may be as much behind the recent parabolic price rise as the anticipated S&P 500 index inclusion.
     
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  7. Dr. J

    Dr. J Active Member

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    If possible, I would look more at (projected) earnings growth than stock price growth. Stocks can get ridiculously overpriced.
     
  8. jhm

    jhm Well-Known Member

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    Sure, we start with the growth of the company, but before we buy a share of stock, we have some idea about how company growth ought to drive growth in the value of the stock. Mapping from future expected earnings or cash flow to its impact on stock value is the essential idea of discounting.
     
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  9. EinSV

    EinSV Active Member

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    @jhm, a few thoughts to chew on.

    Since this thread was started (May 28, 2015), TTM revenues have increased 7.3X while market cap has increased just a bit more (8.3X).

    I would argue that revenue increases alone understates Tesla's performance in that time period, as operating margins have gone from strongly negative to moderately positive, free cash flow has gone from strongly negative to moderately positive, risks have decreased substantially, etc.

    In other words, I think TSLA is priced lower now than it was when you started this thread in 2015 relative to performance, risk, future potential and valuation. It may feel different now because we have had such a rapid share price increase in the past 12 months, but that came after ~5 years of TSLA bouncing around in a fairly narrow range while the company grew dramatically.

    Another issue is that from the very beginning the LTPTs sounded insanely optimistic but in fact are very conservative once you assume ~50% annual growth.

    For example, Elon's original napkin math was that 50% annual growth would result in $350B in revenue in 2025, and with estimated 10% margins that would generate $35B in profit. But to get a market cap of $700B he applied a P/E of only 20.

    In 2025, if Tesla has a 15+ year record of 50% annual growth and is still growing strongly as Elon's more recent targets like multiple Terawatt-hours per year suggest, then a P/E of 20 is ridiculous. Amazon has a P/E well over 100, and its growth is far less than Tesla's.

    The other wrinkle is Full Self Driving, which was barely in the picture in 2015. It seems to me that at this stage for a "blind faith" valuation should have a scenario that assumes that Tesla will succeed at Full Self Driving within a reasonable period of time. Of course that leaves the challenge of estimating what success looks like, what a reasonable period of time is, and what successful FSD would add to the bottom line.
     
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  10. jhm

    jhm Well-Known Member

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    Thanks for your long-term review! The last 5 years has been an amazing run. The funny thing about Musk's original back-of-the-envelop is that he was actually being very conservative, once you assume a sustained 50% annual growth rate. I still think 50% growth is aspirational, but not out of reach or beyond the potential for massive surprise to the upside. Recently Tesla has pivoted to ringing the cash register, giving priority to FCF and profitability over revenue growth. But this is like firing up a rockets second booster. The stock market has reacted strongly to this pivot. The market tends to value earnings more highly than revenue growth, which is kind of the opposite of the Blind Faith approach. Blind Faith says this stock is growing revenue so fast and will generated so much earning well in the future that losses for upcoming quarters really don't matter: You don't need to see earnings today to believe that massive earnings will be in hand many years out. But now that Tesla has made this pivot, perhaps Tesla can get back to solid 50% annual growth. Multi-continental Gigafactory expansion leads the way.

    I do think it is time to set new LTPT for 2030. It does make sense to have one target include fruition of the FSD/Robotaxi vision.

    Let's open this question up for discussion. I would invite people to recommend 2030 market cap targets for:
    Tesla Automotive
    Tesla Energy
    Tesla Autonomous Transport (Robotaxis, autonomous trucking, etc.)
    Total

    Let's see if we can flesh out the full opportunity for 2030. Perhaps the categories I suggest are missing something. Feel free to break things down as you feel fit.

    BTW, I would caution against enumerating specific model production numbers for Tesla Automotive, as that is thinking far too narrowly about how much Tesla can evolve over the next ten years. For example, Tesla could suspend production of all current models because it ventures into a much product portfolio than we can imagine today. One of the important things about Musk's back-of-the-envelop from 2015 is that he spoke in general terms of revenue growth without regard to the precise product mix contributing to that revenue. Musk is both strategic and opportunistic. Once he sees a new direction that can drive revenue growth further than the current trajectory, he will pivot. So we should not get too attached to any element of our short-term view of the company. We should be challenging ourselves to avoid thinking too small, too stuck on what we've seen so far.
     
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  11. hershey101

    hershey101 Member

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    Okay, @jhm I'll take a stab:
    Automotive: 10m cars * $40k ASP * 2x P/S = $800B (~35% anualized growth rate).
    Energy: I believe Energy will continue to be starved on batteries + raw materials.... If I remember correctly, the energy storage business was ~$1.5B for 2019... I'll be a bull and give them 10x growth on the energy side over the next decade (25% anualized)... So far 2020 is not shaping up to meet this, and 2018/2019 have been almost no growth. Even then it's $15B revenues, and I'll pay 5x P/S on that business. That gives us $150B valuation to the energy business...
    Tesla Autonomous: HAHAHA! -$50B ROFL!

    So my valuation comes out to $950B, let's add $50B for brand equity to make it a nice round #. $1T in 2030 is feasable. At a 25% discount rate, that comes out to $84B, or if you discount at 20%, that gives you $137B. Giving a nice range between $500-$750...
     
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  12. Zhelko Dimic

    Zhelko Dimic Careful bull

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    #532 Zhelko Dimic, Jul 28, 2020
    Last edited: Jul 28, 2020
    Automotive (with fat margins) - $1T
    Energy (whatever that means, including becoming distributed power utility) - $1.5T
    Transportation/Logistics (if Amazon doesn't crush them, or there is space for two players and they get on with Shopify) -$2T

    Now, what are we missing?
    Because this falls short of my guess 5 years ago that they can become $5T-$10T company 10-20 years from then.
    Maybe providing batteries/chassis/platform (including software, so other manufacturers become coach builders/assemblers of low complexity parts) for decent chunk of the industry, entertainment powerhouse (music/shows/audiobooks/education), insurance, internet provider, advertisement (when travelling for food/hotels/content) - another couple of $T, or it could be that most of these are still nascent in 10 years...
     
  13. willow_hiller

    willow_hiller Active Member

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  14. Zhelko Dimic

    Zhelko Dimic Careful bull

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    Riight, I was thinking battery/chassis/platform including software for decent chunk of the industry, but forget to put it down when enumerating. Thanks, will update...
     
  15. hershey101

    hershey101 Member

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    Sure if $DXY goes down to 25, we might get there... Let's just weaken the dollar till these numbers make sense.
     
  16. jhm

    jhm Well-Known Member

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    Thanks, @hershey101 and @Zhelko Dimic. If I am reading your posts correctly, for 2030 we have a $1T scenario, $3.5T scenario, and a $5T to $10T scenario.

    I'm not sure what numbers I'm ready to argue for, but here are a few thoughts.

    I think that Tesla is positioned to take a 20% share of the auto market by 2030. It currently has 18% of the plug-in EV market. I expect it to continue to gain EV share to say 30% even as as EVs come to take a 70% or bigger share of the entire auto market by 2030. So 30% * 70% = 21%. This 20% share is at least 20M vehicles, even with robotaxis slowing the growth of new vehicles per year. I would also include supplying batteries and other EV components within this category. So I think this puts Tesla Automotive in range of $2T.

    I'm also bullish on Tesla Energy. In terms of battery supply I think TE consumes half as much GWh as TA, but this is less gross profit per GWh than automotive. But there is much more here than just selling batteries to utilities. I believe the Semi business will be a big growth engine for TE. Large logistics companies will want to develop integrated charging infrastructure to optimize their network. So that is a lot of industrial scale solar and power management equipment. Additionally Megacharger and Supercharger networks will be enormous (supplying a huge chunk of the EV fleet). The scale here is hard to appreciate. I anticipate substantial solar power generation and power storage. The charging networks also provide grid services, especially peak generation and peak load. Also the Solar Roof is perfected, and a substantial fraction homes have some battery storage. So I am thinking $1T on the low side, maybe $3T on the high side.

    Tesla Transport is a huge wildcard. This includes both autonomous trucking and robotaxi. Shuttle services may also be in the mix. Consider that autonomy is displacing driver labor. So this could net $40k or more per vehicle per year. Over the life of a vehicle the labor savings is several times the physical value of the vehicle (without autonomy). The catch, however, is that competition with other providers of vehicle autonomy quickly cuts into the profit potential for autonomy. At first robotaxis compete with human drivers and earn excess profits. Then human drivers fall out of the market and robotaxis compete with each other. The ability delivery robotaxi capable vehicles in high volume is the first point of competition (boosting TA), but later price competition erodes excess profits. So eventually it falls back on who can deliver the most hardware with lowest costs of operation. I think Tesla can dominate this, but Tesla is earning something like 5% to 15% ROA on a fleet of 25M autonomous vehicles in service valued at about $1T. I guess at 20P/E, this is in a neighborhood of $1T to $3T.

    Altogether, I could see Tesla in range of $4T to $8T or $20k/sh to $40k/sh by 2030. I'm still noodling on this. Feedback appreciated.

    Another thing to consider about $20k/sh is that if you discount by 30% for 10 years, you get to $1450/sh today. That seems about right in terms of long-term expected rate of return on holding shares, which has its own thread.
     
  17. jhm

    jhm Well-Known Member

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    TSLA Expected Rate of Return
    Tesla Market Cap 2025

    I actually started these two threads to help us with re-assessing LTPTs here. Note that 50% respondents are looking for a rate of return near 30% and another 42% are looking higher closer to 40% return. Similarly the central expectation of respondents is that Tesla market cap is near $1.00T or $1.25T in 2025, and the bulk are within $750B and $1.5T.

    A 2030 LTPT of $4T (or $20k/sh) would satisfy someone who is looking for a 30% and believes Tesla will have $1.08T market cap in 2025. A $5387 share price in 2025 would justify a price of $1450 today for an investor expecting a 30% return.

    Likewise, a 2030 LTPT of $8T (or $40k/sh) would satisfy the expectations of someone looking for 40% return and believes Tesla will hit $1.49T in 2025. A $7437 share price in 2025 would justify a price of $1383 today for an investor expecting a 40% return.

    These two LTPTs would likely satisfy the expectations of most Tesla longs.

    For a more conservative investor expecting a 20% return (something comparable to QQQ), a 2030 LTPT of $2T (or $10k/sh) would imply $804B cap in 2025 and support of share price of $1600 today. A share price of $4019 in 2025 would justify a share price of $1615 today for an investor expecting 20% return.

    Finally, a 2030 LTP of $1T (or $5k/sh) would satisfy the someone expecting 10% return and believes Tesla will reach $621B market cap in 2025. A share price of $3105 in would justify a price of $1928 today for an investor expecting a mere 10% return.

    It may seem strange to contemplate such widely differing long-term views. But current prices are actually reasonably consistent with all three right now. We can't really look at recent prices a determine which of the three scenarios dominate the market. In deed, the market is made of many different participants that have an even wider view of where Tesla is headed. Ten years from now we'll be able to look back an see which view was most accurate, but in the near term we can all trade blindly according to our own outlook.
     
  18. Dr. J

    Dr. J Active Member

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    I could be way off, so...

    This NYT listing of automotive market capitalization adds up to just under $600B (note that some companies are listed in $B and some in $M, and I did some rough math), and TSLA makes up nearly half ($273.7 B) of the total. If this Thompson Reuters data is accurate, and I have no idea if it is, do we really think that "Because Tesla" the global automotive market cap in 2030 is $10T ($2T / .2), a ~17-fold increase? Or will the rest of the global automotive market cap be worth roughly [edit] minus $1.5T (~$500B - $2T)? Or somewhere in between?

    I think the error here is the extrapolation of a current (outsized, by any measure) TSLA market cap within the industry to a future TSLA market cap (outsized, by any measure) within a much, much more valuable industry. I just don't see personal vehicles as becoming *that* valuable over the next decade. Especially not if FSD/robotaxis become a thing (which I seriously doubt).

    I think the value of TSLA got way ahead of itself, and I acted on this by selling [edit] Monday before last (fortunately or unfortunately, time will tell). Extrapolating from current valuation is prone to errors, IMHO. If that is so, the errors could be huge. But, again, I could be way wrong.
     
  19. jhm

    jhm Well-Known Member

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    You might want to consider the financials of Toyota. $277B annual revenue. 18% gross margin. 6.9% profit margin. Tesla has been aiming at 25% gross margin and 10% profit margin. Not quite there yet but gaining 3% on Toyota’s profit margin does not seem unrealistic to me.

    Tesla has much more regulatory room to focus on high margin vehicles, instead of having to hit emissions fleet standard. Tesla is more vertically integrated than most automakers, increasing gross profit orofitability. Moreover, the BEV drive train is continuing to gain cost advantages. By mid-decade Tesla could enjoy a lower cost structure advantage over all ICE makers.

    So I don't view getting to a 10% profit margin to be unrealistic. So the next question is simply how much revenue can grow. Getting to 20M vehicle at $50k per vehicle (note 2030 USD and inclusive of commercial vehicles) is $1T revenue, $100B net income. So this looks to me worth multiple trillions in market cap for a company that is still growing at a substantial clip.

    I am not arguing that the whole industry will be worth $10T in 2030. Many legacy automakers will be unprofitable and declining, if they in fact survive that long.
     
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  20. hershey101

    hershey101 Member

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    Hmm... 20M vehicles in 2030 is ~45% growth YoY from 500k in 2020... Seems high but I'll grant that to you.
    I value it as follows 20M * $30k (ASP) * 2 P/S = $1.2T.

    Let's say we can get to 20M in 2030... In terms of today's Gigafactories, that would require 40 gigafactories around the world producing 500k each. Let's assume we gain 15% YoY manufacturing improvements over the next 5 years, so each gigafactory after 2025 can manufacture 1m cars. Even then you probably are looking at 25-30 gigafactories by 2030. If we are battery supply constrained, we need the combination of energy density + improved manufacturing to increase at higher than the 45% growth rate just to meet the battery demands. LiON battery efficiency has been improving at ~10% last I checked, so we need battery production to double every ~2 years. Probably doable, but this is just for cars.

    Keep in mind you are also going to have to expand charging infrastructure at a similar pace to keep the same ratio of chargers:vehicles... So just from the automotive model, we have a doubling of sales, charging infra, manufacturing and supply every ~2 years sustained for 10 years! Well, I guess the thread is called "blind faith" lol.

    How much battery storage do you think will be required here? Is there any feasable way for us to get batteries for all of this? Or are you expecting some breakthrough during battery day that "solves" the supply constraint problem?

    I would not put any credence into $TSLA's claims of "autonomous taxis". This is an incredibly difficult problem, I've worked in this space for 4+ years as a computer-vision researcher, and the gap between "feature complete", "safe as human", "10x safer than human", and "large scale production deployment" are like giant chasms.... What you are modeling is 20+ years of R&D compressed to <5 years for Tesla to be successful.
     
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