TMC is an independent, primarily volunteer organization that relies on ad revenue to cover its operating costs. Please consider whitelisting TMC on your ad blocker and becoming a Supporting Member. For more info: Support TMC

Blind Faith Price Targets

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

Tags:
  1. Dr. J

    Dr. J Active Member

    Joined:
    Aug 23, 2017
    Messages:
    1,455
    Location:
    Fort Worth, Texas
    I don't disagree with any of this, conjecturally. But if in 2030 Tesla owns 20% of the global automotive market, while they may have been growing at a substantial clip, that growth has to slow down or they will in a short time sell more cars than the market as a whole (meaning: it can't happen). Since the stock market is a discounting mechanism, it will figure out/will have figured out that Tesla's automotive growth rate has slowed/will slow and value the stock at an appropriately lower multiple.

    At some point, the growth rate is bound to slow. It may not be because the legacy automakers get their stuff together; it may not be because new EV entrants compete effectively; it may not be because Tesla becomes battery-constrained, or service-inept, or Supercharger-exhausted. But if not any of those, it will be because there are limits to growth in the automotive industry.
     
    • Like x 1
  2. jhm

    jhm Well-Known Member

    Joined:
    May 23, 2014
    Messages:
    8,824
    Location:
    Atlanta, GA
    If you look at my earlier post, I was developing a scenario where EVs are only about 70% of the auto maker. This leaves Tesla with an opportunity to keep growing roughly another 50%. This is slower than the 40% annual rate average for this decade, but still double digit growth is possible.

    Additionally, the economics of AEVs are at this time expanding motorization rates in developing economies. As you drive down the total cost per mile, automotive mobility becomes affordable in many more parts of the world. Additionally, if Tesla succeeds in long life "million mile" vehicles, developing countries will be amassing large fleets of EVs. So globally the EV industry can grow in the 2030s than it did in the 2010s, much faster than the population.
     
    • Helpful x 1
  3. EinSV

    EinSV Active Member

    Joined:
    Feb 6, 2016
    Messages:
    4,232
    Location:
    NorCal
    Through Q2 2020 Tesla's 5 and 7 year revenue growth rates are 47% and 53%. The 5 year growth rate was very close to 50% even though (1) the last two quarters have been hindered by a pandemic and (2) we are in a period where Gigafactories and production lines are sprouting like mushrooms and the rate of growth of theoretical capacity appears to be exceeding that of production itself. This should reverse over the next few years as it did in 2018 as the new Gigafactories and production lines ramp up and crank out Model Ys, 3s and Cybertrucks at volume.

    Since Elon has consistently used 50% growth as a benchmark for Tesla, to me that seems like a good starting point for a "blind faith" benchmark through at least 2025. With multiple Terawatts as the end goal, an argument could be made for extending continued 50% growth beyond 2025. Until there is more specific post 2025 guidance (perhaps on Battery Day?), an argument could be made for a somewhat lower growth rate (say 40%) from 2026-2030 as a placeholder. This would result in ~$1T in revenues in 2030, which is consistent with projections from Ron Baron. While this is massive, it would be consistent with continued rapid growth in automotive as well as even faster growth in the energy business, which Elon has consistently said will ultimately be roughly the same magnitude as automotive.

    Another option that doesn't require adopting a specific post-2025 growth rate just yet would be to just keep the original 2025 targets but use a more realistic P/E for a company growing revenues at ~50% and earnings at >50% that still has a huge growth runway into several enormous markets. We could debate what that is but a P/E of 100 or more would be lower than Amazon, which has a long term growth rate of a mere 25-30%. The conceptual difference between the earlier blind faith model is that the P/E of 20 assumes a mature company, while the multiple Terawatt hour goal Elon articulated last year implies either much faster than 50% growth or a much longer growth runway. Assuming the longer growth runway which justifies a much higher 2025 multiple. Since we may get a hint of Elon's thinking on long term growth on Battery Day, holding off on guessing about specific growth rates after 2025 seems like a decent approach.

    The last piece is mobility. There are plenty of models out there to value it. Not sure of the best way to align any of those with guidance from Elon/Tesla consistent with the "blind faith" theme of this thread but will give it some thought.
     
    • Like x 2
  4. EinSV

    EinSV Active Member

    Joined:
    Feb 6, 2016
    Messages:
    4,232
    Location:
    NorCal
    #544 EinSV, Jul 30, 2020 at 10:35 PM
    Last edited: Jul 30, 2020 at 10:50 PM
    As a quick follow-up, Elon has recently reiterated the 50% growth target. Sometimes it is in the context of production (unit) growth, but in on the Q4 call he tied it to his earlier 50% growth target, which appears to be a reference to the 2015 50% revenue growth target that inspired this thread.


    Elon Musk -- Co-Founder and Chief Executive Officer

    Yeah. I think a few years ago, I said I -- yes, I think on our [Indecipherable] a few years ago, I said in my estimate, for us is that, Tesla would grow at an average compound annual rate -- average rate of in excess of 50%. I still hold to that belief.

    Tesla, Inc. (TSLA) Q4 2019 Earnings Call Transcript | The Motley Fool

    On the Q1 2020 call, Elon reiterated the 50% growth target yet again. Note that he specifically rejected 40% as being "more realistic." He said 50% probably was "the likely number" and described 40% as a lower boundary -- basically a bearish blind faith case.

    Speaker 1: (23:33)
    Thank you. Now let’s go to questions from retail investors. Question number one, Elon has mentioned a 50% compound annual growth target for Tesla in the past. Is this still in line with Tesla’s ambitions for the next 5 to 10 years? This would 4 million vehicles in 2025 and more than 20 million vehicles in 2030. Is 40% a more realistic target?

    Elon Musk: (23:57)
    Well, it’s always difficult to predict what the macro situation is going to be. I think very few people would have predicted the unexpected sort of roundhouse that Covid came up with that sort of came out of nowhere. I think in the absence of some massive force majeure event, like quite massive, I think probably 50% is the likely number. It’s possible that it’s 40%. I would be very shocked if it’s less than 40%, even with a force majeure, short of World War Three. Tesla (TSLA) Q1 2020 Earnings Call Transcript - Rev
    These comments suggest to me that a 50% growth rate should continue to be the base case for a "blind faith" valuation, with 40% perhaps a bear case.

    PS As a side note, the Motley Fool transcript badly butchers the last quote above from Elon, and reads as though he is suggesting a 40% growth rate going forward. The transcript quoted above is much clearer.
     
    • Informative x 1
    • Like x 1
  5. jhm

    jhm Well-Known Member

    Joined:
    May 23, 2014
    Messages:
    8,824
    Location:
    Atlanta, GA
    While we are trying to spot our North Star for 2030, I thought it would be good to apply the BFPT methodology to ARK Innovation Fund (ARKK).

    Here we don't some authority figure to point us to a specific LTPT. I've noted that the long-term growth rate is near 30%. We do know that ARK seeks out innovative companies with a solid 10 to 15 year growth opportunity. ARK develops a 5-year target for each candidate for the fund and uses this as a guide for allocation. My hunch is that they attempt to have a well diversified portfolio that has an expected 5-year rate of return near some target like 30%. This is tricky because many of their stocks can meander in the doldrums for years as Tesla had prior to this year. So they have a large portfolio with 35 to 55 names, IIRC. We also know that when one of their stocks rocks past a 10% share of the portfolio, they no longer buy into it, but will tend to trim back the position.

    Whatever the details of their methodology, we can only hope that they will be able to replicate similar growth rates over the next decade as they had over the last 6 years. So the basic touch point that I use for constructing a 2030 LTPT for ARK is that I want median sentiment to have an implied discount rate of nearly 30%. The LTPT of $1000 is a nice round number that gets us into the ballpark. Those who have read and understood this thread will know that the price level of the the LTPT is not all that critical.

    Under Standard 2030 LTPT of $1000, the BFPT methodology back tests nicely. First, we look at 1-year returns as predicted by Implied Discounts.

    upload_2020-7-31_18-23-51.png
    Here we see that near 30% implied discount, the average return is close to 40%. Keep in mind that the implied discount is a long-term rate stretching out to 2030 while 1-year return is clearly short term. Below a 28% IP, the first year could be a disappointment, but beyond the first year the average rate of return should be quite healthy. We do see strong correlations here (R-squared 0.70), which confirms that IP has predictive power and may be useful for identifying times when ARKK is underpriced for near-term gains.

    Next, we look at sentiment which is calibrated on a 36-month lookback period.

    upload_2020-7-31_18-34-3.png
    It is nice to see that sentiment is well spread out and bearish disbelief correlates with high near-term returns. When sentiment is below 60% near-term results may tend to be above average.

    The back testing looks good. Indeed it looks better than the back testing for Tesla. In particular, Tesla seems prone to huge mood swings in sentiment so that Tesla can be substantially underpriced for long stretches of time and potentially overpriced too though we don't have much experience with that. By contrast, ARKK does not seem so driven by sentiment. That is both sentiment and IP have similar predictive power for 1-year returns. This is not so with Tesla as the sentiment tends to anticipate performance better than IP. Perhaps an advantage of ARKK is that as it is a fund, shorts can't attack it the way they can an individual named stock. Surely shorts are do doing their thing on any number of stocks held by ARKK, but the diversification of the fund may provide some insulation from this.

    Without further ado, here are the BFPT for ARKK. Enjoy!


    Standard LTPT $1,000
    Lookback 36 months
    Percentile
    Implied Discount
    2020-07-31
    2020-12-31
    2021-07-31
    2021-12-31
    2022-12-31
    2023-12-31
    2024-12-31
    2025-12-31
    98.3%​
    27.4%​
    $80​
    $89​
    $102​
    $113​
    $144​
    $184​
    $234​
    $298​
    2%​
    33.7%​
    $48​
    $55​
    $65​
    $73​
    $98​
    $131​
    $175​
    $234​
    10%​
    31.8%​
    $56​
    $63​
    $74​
    $83​
    $110​
    $145​
    $191​
    $252​
    20%​
    31.2%​
    $59​
    $66​
    $77​
    $87​
    $114​
    $149​
    $196​
    $257​
    30%​
    30.6%​
    $62​
    $69​
    $81​
    $90​
    $118​
    $154​
    $201​
    $263​
    50%​
    29.6%​
    $67​
    $74​
    $87​
    $97​
    $125​
    $162​
    $211​
    $273​
    70%​
    28.8%​
    $71​
    $79​
    $92​
    $102​
    $132​
    $170​
    $219​
    $282​
    80%​
    28.3%​
    $75​
    $83​
    $96​
    $106​
    $136​
    $175​
    $224​
    $288​
    90%​
    28.0%​
    $77​
    $85​
    $98​
    $109​
    $139​
    $178​
    $228​
    $291​
    98%​
    27.4%​
    $80​
    $89​
    $102​
    $113​
    $144​
    $183​
    $234​
    $298​
     
    • Informative x 1
  6. hershey101

    hershey101 Member

    Joined:
    Jan 22, 2013
    Messages:
    950
    Location:
    New York, New York, United States
    @jhm How have you defined "Sentiment" in this analysis?
    Also, I'd be curious to see what this distribution looks like if pre-2020 (eg. only using values to Dec. 31st 2019), and also what it would look like if we only used values to the end of Q3 2019.
     
  7. hershey101

    hershey101 Member

    Joined:
    Jan 22, 2013
    Messages:
    950
    Location:
    New York, New York, United States
    One small issue with using BFPT on $ARKK:
    Their current AUM is just under $5B... tiny in the grand scheme of things. Given their popularity I suspect this will grow rapidly. If we assume they double AUM to $10B, and then stop taking outside investments, even then: a sustained 30% YoY growth-rate would result in that AUM ballooning to $100B+ in 2030.

    A key component of their strategy is to take sizable positions in small/mid-size businesses that are disruptors, and trade around controversy to deliver growth. In the past 5 years since inception, their two biggest holdings, $TSLA and $SQ have 10x'd.
    This model assumes they continue to find a 10x company at an average pace of one every 2.5 years, and also, that they are somehow able to move $50B+ in assets in and out of the system as easily as they can $5B without moving the underlying price with their buying/selling.

    Those are two very big assumptions you've baked into this price target.
     
  8. Dr. J

    Dr. J Active Member

    Joined:
    Aug 23, 2017
    Messages:
    1,455
    Location:
    Fort Worth, Texas
    To your point, finding one or more small cap firms that can deliver 10x SP increase is one thing; finding one or more mid-cap firms that can do that is maybe 10x rarer. Increased AUM is definitely problematic. OTOH, these days the giants are the ones growing exponentially, and small cap stocks (especially value) are getting crushed.
     
  9. jhm

    jhm Well-Known Member

    Joined:
    May 23, 2014
    Messages:
    8,824
    Location:
    Atlanta, GA
    You need to read this thread from the beginning to understand the concepts we are using here.
     
  10. jhm

    jhm Well-Known Member

    Joined:
    May 23, 2014
    Messages:
    8,824
    Location:
    Atlanta, GA
    I don't see how AUM has anything to do with share price. AUM has to donwith how much investors want to invest with this fund, but the share price is driven by the return on investment on their underlying portfolio. Basically their share price can grow 30% per year without AUM growing one dollar, which would be the case if shareholders sold off their shares as the grew.
     
  11. hershey101

    hershey101 Member

    Joined:
    Jan 22, 2013
    Messages:
    950
    Location:
    New York, New York, United States
    Here's what I mean:
    If they invest $100M in some company $X, and the company 10xs, their investment has gone from $100m to $1B. Great. Now let's assume that this company hit ARK's price target, so they pull out their money. Well, they now have $1B in cash. If they do nothing with $1B, then $ARKK's portfolio is 100% bonds and $ARKK essentially tracks bonds.
    If they want to continue to produce 30%+ YoY growth, they now need to grow $1B at 30%+ instead of $100M. IF they choose small companies where they cannot infuze $1B without moving the markets, then instead of 1 company $Y to replace $X, they now need to find 10 different companies to replace $X $Z_1, ..., $Z_10 each with $100M investments. Otherwise, they'll end up with $100m of $1B invested, and the change in their investment will only result in 10% change in $ARKK.

    Obviously this is an oversimplification, but does that explain what I mean?
     

Share This Page

  • About Us

    Formed in 2006, Tesla Motors Club (TMC) was the first independent online Tesla community. Today it remains the largest and most dynamic community of Tesla enthusiasts. Learn more.
  • Do you value your experience at TMC? Consider becoming a Supporting Member of Tesla Motors Club. As a thank you for your contribution, you'll get nearly no ads in the Community and Groups sections. Additional perks are available depending on the level of contribution. Please visit the Account Upgrades page for more details.


    SUPPORT TMC