Blind Faith Price Targets

[jhm]

The current price of $210 is in the 7th percentile. When the trend is in your favor, it is sure a lot easier to believe. The BFPT gauge suggests enormous upside potential. So let's see where those targets stand.

Percentile	Implied Discount	3/10/2016	1/20/2017	3/10/2017	1/19/2018	3/10/2918
current 7%	33.54%	$210	$270	$280	$360	$374
0%	38.44	147	195	204	270	283
5	34.15	201	259	269	347	361
25	30.68	260	327	339	428	444
50	28.81	299	372	385	479	496
75	27.55	329	407	420	518	536
95	26.01	371	453	468	571	589
100	25.01	401	487	502	608	627

My personal view is that the price will be near the 25% percentile in 12 months, hence $339. I think that longs have learned not to give Tesla alot of hype. The last time we had a bull run the price charged up into the 3rd quartile and longs slowed the pace of buying. Thus, we did not run up to a new ATH. This sort of restraint on account of longs is pretty healthy in my view. So with that perspective I am inclined to sell when we get above median sentiment, $385 in 12 months.

Good luck.

 

[everman]

I love this thread... :biggrin:

 

[jhm]

I love this thread... :biggrin:

Thanks!

 

[EinSV]

This thread is fascinating to me as a general approach about how to value Tesla. I have used slightly different revenue/profit projections for 2025 but the same basic idea.

As I've thought more about this type of approach and especially in light of the pending Model 3 launch, I have wondered about whether there is another factor that should be worked into the model for a company like Tesla.

When Tesla started out as a small startup building a few prototype Roadsters, there were enormous perceived hurdles to its success. By the time of the IPO in June 2010, it had started to chip away at those hurdles by introducing its first elegant proof of concept, an EV sports car that could outperform similarly priced ICE competitors. This, and the Secret Master Plan, was enough to raise enough excitement among investors to fund a successful IPO in June 2010.

Only a few years later, by late 2012, it had introduced the Model S and demonstrated to the satisfaction of virtually every car magazine (if not the general public yet), that it could similarly bring a premium EV to market that was better than the existing ICE competition. A few months later, this opinion was borne out in rapidly increasing sales of the Model S.

A second, even more convincing, proof of concept.

If you apply the BFPT targets backwards to the period between the IPO and the initial commercial success of the Model S and project it all the way forward to 2025, the expected rates of return for investors who believed that the Secret Master Plan could result in something like the "blind faith" targets, you find rates of return that exceed a whopping 40% per year over that entire period:

June 2010 (IPO): $17: 41%
Nov. 2012 (Car Magazines Rave About Model S): $31: 43%

Fast forward just a few months -- to June 2013 -- and the stock had shot up, after Model S's initial commercial success.

Since that time, the expected return for long-term investors who believe in something like the BFPT targets has dropped from a little above 40% to a "mere" 30%:

June 2013 (Model S sales ramp): $110 32%
June 2015: $268 28%
March 24, 2016 (today): $227 33%

Thus, while the expected rates of return remain extremely high they are significantly lower than for early investors. I.e., there was a significant discontinuity/drop between the time of the IPO and June 2013, when the Model S provided proof that EVs could be successful in at least one (very important) market segment.

But, and here is where it starts getting interesting (finally, you may say!), the expected rate of return that is currently implied by the BFPT -- around 30% -- is still extraordinarily high. Such an outsized rate of return can only be explained by the fact that most investors don't think Tesla has much of a chance of growing into a company of the size and profitability implied by the BFPT.

In other words, the Model S proof of concept was not enough for the average investor. It was still too easy to believe that EVs would never be economical or accepted by the general public, and would be stuck as niche vehicles, playthings for the rich or EV fanatics.

But if Tesla continues to ramp 50% per year with a successful launch of the Model 3 the perception that EVs can only be niche vehicles will be disproven to all but the most stubborn bears. I believe it is impossible for Tesla to stay on the fast growth track that would permit it to meet the BFPT in 2025 but continue to permit investors to enjoy such a massive discount rate. Why? For the simple reason that as major risks are taken off the table, more investors will jump in. Sorry, but no one is allowed to enjoy a 30% return year after year on anything but a stock that is perceived by the market to be extremely risky.

But here is the kicker: Once those perceived risks are reduced, as I believe they will be if Tesla is able to launch a successful and at least marginally profitable Model 3, the expected rate of return has to drop. The central bear thesis ---- that EV's are nothing more than niche vehicles -- will no longer be credible for most investors.

If that happens, and I believe it very likely will, there could be a second inflection point (akin to what happened in 2012/2013) in the perceived risks to Tesla. Proving the EV model -- perhaps the greatest source of skepticism/perceived risk to Tesla in the market -- will no longer be tenable. Instead, the bear case will have to focus on more mundane things like competition, perceived quality, etc.

With the EV model proven and this central risk to Tesla largely off the table, the case for Tesla growing into a company with the market cap Elon predicted will be much more likely. All of a sudden it is a market leader in the new automobile industry centered around EVs. And with reduced risks of meeting the BFPT revenues/profits, expected returns will necessarily be reduced significantly.

What does this mean if you are one of those who believe that something along the lines of the BFPT market cap assumptions for 2025 are reasonable?

It means that a version of the BFPT model that assumes a constant discount rate significantly understates the potential returns between now and 2020.

If you keep all the other assumptions of the BFPT model the same, but assume a still very high 20% expected rate of return for 2020-2025, that implies a median expected stock price of $1442 on December 31, 2020. If you assume a 15% expected rate of return from 2020-2025, that implies a median expected stock price of $1785 at the end of 2020, if Tesla remains on track with the Secret Master Plan, 50% growth per year, and a successful Model 3 launch.

In other words, if you believe the Secret Master Plan will work and that Tesla is on track to continue growing at a 50% clip, the next four to five years have even more upside than the BFPT model predicts (which are ridiculously high to begin with).

This is without taking account the views that have been expressed in other parts of this forum that the 500,000 target in 2020 is too low. And it ignores potential breakthroughs in the battery business or other Tesla innovations that none of us even envision yet.

Ok, it is time for me to have a drink (or two). In the meantime, if anyone wants to take potshots at all this crazy talk, please have at it.

And apologies that I could not present this concept with a nifty graph. That sort of thing would really help here but is not my strong suit.

 

[jhm]

This thread is fascinating to me as a general approach about how to value Tesla. I have used slightly different revenue/profit projections for 2025 but the same basic idea.

As I've thought more about this type of approach and especially in light of the pending Model 3 launch, I have wondered about whether there is another factor that should be worked into the model for a company like Tesla.

When Tesla started out as a small startup building a few prototype Roadsters, there were enormous perceived hurdles to its success. By the time of the IPO in June 2010, it had started to chip away at those hurdles by introducing its first elegant proof of concept, an EV sports car that could outperform similarly priced ICE competitors. This, and the Secret Master Plan, was enough to raise enough excitement among investors to fund a successful IPO in June 2010.

Only a few years later, by late 2012, it had introduced the Model S and demonstrated to the satisfaction of virtually every car magazine (if not the general public yet), that it could similarly bring a premium EV to market that was better than the existing ICE competition. A few months later, this opinion was borne out in rapidly increasing sales of the Model S.

A second, even more convincing, proof of concept.

If you apply the BFPT targets backwards to the period between the IPO and the initial commercial success of the Model S and project it all the way forward to 2025, the expected rates of return for investors who believed that the Secret Master Plan could result in something like the "blind faith" targets, you find rates of return that exceed a whopping 40% per year over that entire period:

June 2010 (IPO): $17: 41%
Nov. 2012 (Car Magazines Rave About Model S): $31: 43%

Fast forward just a few months -- to June 2013 -- and the stock had shot up, after Model S's initial commercial success.

Since that time, the expected return for long-term investors who believe in something like the BFPT targets has dropped from a little above 40% to a "mere" 30%:

June 2013 (Model S sales ramp): $110 32%
June 2015: $268 28%
March 24, 2016 (today): $227 33%

Thus, while the expected rates of return remain extremely high they are significantly lower than for early investors. I.e., there was a significant discontinuity/drop between the time of the IPO and June 2013, when the Model S provided proof that EVs could be successful in at least one (very important) market segment.

But, and here is where it starts getting interesting (finally, you may say!), the expected rate of return that is currently implied by the BFPT -- around 30% -- is still extraordinarily high. Such an outsized rate of return can only be explained by the fact that most investors don't think Tesla has much of a chance of growing into a company of the size and profitability implied by the BFPT.

In other words, the Model S proof of concept was not enough for the average investor. It was still too easy to believe that EVs would never be economical or accepted by the general public, and would be stuck as niche vehicles, playthings for the rich or EV fanatics.

But if Tesla continues to ramp 50% per year with a successful launch of the Model 3 the perception that EVs can only be niche vehicles will be disproven to all but the most stubborn bears. I believe it is impossible for Tesla to stay on the fast growth track that would permit it to meet the BFPT in 2025 but continue to permit investors to enjoy such a massive discount rate. Why? For the simple reason that as major risks are taken off the table, more investors will jump in. Sorry, but no one is allowed to enjoy a 30% return year after year on anything but a stock that is perceived by the market to be extremely risky.

But here is the kicker: Once those perceived risks are reduced, as I believe they will be if Tesla is able to launch a successful and at least marginally profitable Model 3, the expected rate of return has to drop. The central bear thesis ---- that EV's are nothing more than niche vehicles -- will no longer be credible for most investors.

If that happens, and I believe it very likely will, there could be a second inflection point (akin to what happened in 2012/2013) in the perceived risks to Tesla. Proving the EV model -- perhaps the greatest source of skepticism/perceived risk to Tesla in the market -- will no longer be tenable. Instead, the bear case will have to focus on more mundane things like competition, perceived quality, etc.

With the EV model proven and this central risk to Tesla largely off the table, the case for Tesla growing into a company with the market cap Elon predicted will be much more likely. All of a sudden it is a market leader in the new automobile industry centered around EVs. And with reduced risks of meeting the BFPT revenues/profits, expected returns will necessarily be reduced significantly.

What does this mean if you are one of those who believe that something along the lines of the BFPT market cap assumptions for 2025 are reasonable?

It means that a version of the BFPT model that assumes a constant discount rate significantly understates the potential returns between now and 2020.

If you keep all the other assumptions of the BFPT model the same, but assume a still very high 20% expected rate of return for 2020-2025, that implies a median expected stock price of $1442 on December 31, 2020. If you assume a 15% expected rate of return from 2020-2025, that implies a median expected stock price of $1785 at the end of 2020, if Tesla remains on track with the Secret Master Plan, 50% growth per year, and a successful Model 3 launch.

In other words, if you believe the Secret Master Plan will work and that Tesla is on track to continue growing at a 50% clip, the next four to five years have even more upside than the BFPT model predicts (which are ridiculously high to begin with).

This is without taking account the views that have been expressed in other parts of this forum that the 500,000 target in 2020 is too low. And it ignores potential breakthroughs in the battery business or other Tesla innovations that none of us even envision yet.

Ok, it is time for me to have a drink (or two). In the meantime, if anyone wants to take potshots at all this crazy talk, please have at it.

And apologies that I could not present this concept with a nifty graph. That sort of thing would really help here but is not my strong suit.

You are very correct in your analysis. As Tesla matures and proves itself, I do expect the median implied discount to decline, and in fact this sort of shift did occur over 2013 as you noted. What's tricky here is that the shift in discount is conditional on derisking and success happening along the way, and we can't be sure of that before it actually happens. For example, discounting increased through 2015 in large measure because of delays in the Model X and the decline in oil. So it is very hard to predict whether median discount will rise or fall over say the next 12 months, because we do not see all the obstacles that will be enountered over that period.

So here is my thinking about how to model that. First I am fine with the Model being somewhat conservative. Yes I do expect median discount to decline over the longrun, but assuming that this is constant is simple and conservative. Simplicity is also an important quality, because if a model is simple, I and others are in a better position to understand it's limitations and make reasonable adjustments, as your analysis demonstrates. However, implied discount does change. So I calibrate this to the most recent 24 months of market prices. This way I am allowing the market to tell me what it's discount distribution looks like and how it changes over time.

So it is possible that one could anticipate how median discount shift with the unfolding of events like the Model 3, but this is actually of secondary concern. The more immediate concern is what percentile we might shift to given the current distribution. For example, suppose we have recently moved from the 10th percentile to the 15th. Where will sentiment be in say 6 months? Will we get above median or might somewhat bearish sentiment persist to keep the price below the 25th percentile? So if you can anticipate the shifts in sentiment, you can do quite well with trading. Anticipating a longer term shift in median implied discount may help with a buy and hold strategy, but this plays out on a much longer timescale and may not be so helpful in trading.

One thing that I like to caution people about is getting too caught up in current sentiment and using that to reset longer term expectations. The whole point of the BFPT approach is to keep focus on the longterm view even as market prices and current issues would compel you to amend that view. It is a bit like sailing north. No matter where your boat has drifted, you continue to set your sight on the North Star. And in so doing, you continue to advance north. Just a few months ago, people had such a dismal view of the stock, that they wanted to know how the BFPT would change if we assumed lower growth rates. We explored that as a matter of a sensitivity analysis. However, it illustrates the all too human response to start reducing longterm expectations in light of present disappinting conditions. I suppose it the stock price were to jump to $405 in six months, people would want to know what happens if we assume a faster growth rate. Again the temptation is to revise expectation on light of bullish conditions. The problem with this temptation is that it can lead you to avoid buying when prices are most bearishly low or to delay selling when prices are unsustainably high. But these are the mistakes that BFPT is designed to correct. To be sure, there are times to change the longterm target, but this is based on when the business is clearly shifting its trajectory, not merely the shifting sands of market sentiment.

Anyway, thank you for your interest and perceptive comments. I hope we can continue a productive discussion along the way. Cheers.

 

[EinSV]

You are very correct in your analysis. As Tesla matures and proves itself, I do expect the median implied discount to decline, and in fact this sort of shift did occur over 2013 as you noted. What's tricky here is that the shift in discount is conditional on derisking and success happening along the way, and we can't be sure of that before it actually happens. For example, discounting increased through 2015 in large measure because of delays in the Model X and the decline in oil. So it is very hard to predict whether median discount will rise or fall over say the next 12 months, because we do not see all the obstacles that will be enountered over that period.

So here is my thinking about how to model that. First I am fine with the Model being somewhat conservative. Yes I do expect median discount to decline over the longrun, but assuming that this is constant is simple and conservative. Simplicity is also an important quality, because if a model is simple, I and others are in a better position to understand it's limitations and make reasonable adjustments, as your analysis demonstrates. However, implied discount does change. So I calibrate this to the most recent 24 months of market prices. This way I am allowing the market to tell me what it's discount distribution looks like and how it changes over time.

So it is possible that one could anticipate how median discount shift with the unfolding of events like the Model 3, but this is actually of secondary concern. The more immediate concern is what percentile we might shift to given the current distribution. For example, suppose we have recently moved from the 10th percentile to the 15th. Where will sentiment be in say 6 months? Will we get above median or might somewhat bearish sentiment persist to keep the price below the 25th percentile? So if you can anticipate the shifts in sentiment, you can do quite well with trading. Anticipating a longer term shift in median implied discount may help with a buy and hold strategy, but this plays out on a much longer timescale and may not be so helpful in trading.

One thing that I like to caution people about is getting too caught up in current sentiment and using that to reset longer term expectations. The whole point of the BFPT approach is to keep focus on the longterm view even as market prices and current issues would compel you to amend that view. It is a bit like sailing north. No matter where your boat has drifted, you continue to set your sight on the North Star. And in so doing, you continue to advance north. Just a few months ago, people had such a dismal view of the stock, that they wanted to know how the BFPT would change if we assumed lower growth rates. We explored that as a matter of a sensitivity analysis. However, it illustrates the all too human response to start reducing longterm expectations in light of present disappinting conditions. I suppose it the stock price were to jump to $405 in six months, people would want to know what happens if we assume a faster growth rate. Again the temptation is to revise expectation on light of bullish conditions. The problem with this temptation is that it can lead you to avoid buying when prices are most bearishly low or to delay selling when prices are unsustainably high. But these are the mistakes that BFPT is designed to correct. To be sure, there are times to change the longterm target, but this is based on when the business is clearly shifting its trajectory, not merely the shifting sands of market sentiment.

Anyway, thank you for your interest and perceptive comments. I hope we can continue a productive discussion along the way. Cheers.

JHM, thank you very much for your thoughtful response. It sounds like we are on very much the same page. I am more of a long-term investor but appreciate the benefit to both traders and long-term investors of having straightforward and conservative benchmarks to provide guidance.

The main point I was trying to convey is that, in my view, there are a small number of key inflection points in Tesla's share price/discount rate that are dependent upon the extent to which Tesla has proven its central thesis that EV is superior to ICE. There was an inflection point in 2012/2013 with the launch of the Model S, but the discount rate to the BFPT has bounced around in the same zone since then.

I believe it is likely that the next inflection point will happen when the Model 3 proves to ordinary investors Tesla's thesis that EV is superior to ICE. That may not be accepted in 10 days, when the demand is proven after the Model 3 launch. But by 2020, when there are hundreds of thousands of Model 3s on the road and making at least a modest profit for Tesla, I believe it will no longer be possible to deny that this technology is the future. Probably before then, but, like you, I prefer to be conservative and in my mind 2020 is a conservative boundary for this shift in thinking to have taken place.

The only remaining hurdle at this point, as JB has said, is cost. There is no question that EVs will be more cost effective than ICE vehicles in the near future at most price points. I believe this will very likely happen between now and 2020, i.e., the Model 3 will outperform all comparable ICE vehicles and will be produced at a cost that will allow at least a modest profit based on some reasonable benchmark. If that happens, and I believe it will, it could be a very interesting couple of years.

To use your North Star analogy, we have learned that space is curved (still trying to get my head around that), so the path to the North Star is not necessarily straight. Share prices have been bouncing around the bottom of the BFPT range for a while, but once the EV thesis is accepted by the market, a spike in share price outside the linear BFPT path may not be a signal to sell, at least for long-term investors. It may be that all is well, the ship has found its course and is, once again, sailing in the right direction.

 

[jhm]

JHM, thank you very much for your thoughtful response. It sounds like we are on very much the same page. I am more of a long-term investor but appreciate the benefit to both traders and long-term investors of having straightforward and conservative benchmarks to provide guidance.

The main point I was trying to convey is that, in my view, there are a small number of key inflection points in Tesla's share price/discount rate that are dependent upon the extent to which Tesla has proven its central thesis that EV is superior to ICE. There was an inflection point in 2012/2013 with the launch of the Model S, but the discount rate to the BFPT has bounced around in the same zone since then.

I believe it is likely that the next inflection point will happen when the Model 3 proves to ordinary investors Tesla's thesis that EV is superior to ICE. That may not be accepted in 10 days, when the demand is proven after the Model 3 launch. But by 2020, when there are hundreds of thousands of Model 3s on the road and making at least a modest profit for Tesla, I believe it will no longer be possible to deny that this technology is the future. Probably before then, but, like you, I prefer to be conservative and in my mind 2020 is a conservative boundary for this shift in thinking to have taken place.

The only remaining hurdle at this point, as JB has said, is cost. There is no question that EVs will be more cost effective than ICE vehicles in the near future at most price points. I believe this will very likely happen between now and 2020, i.e., the Model 3 will outperform all comparable ICE vehicles and will be produced at a cost that will allow at least a modest profit based on some reasonable benchmark. If that happens, and I believe it will, it could be a very interesting couple of years.

To use your North Star analogy, we have learned that space is curved (still trying to get my head around that), so the path to the North Star is not necessarily straight. Share prices have been bouncing around the bottom of the BFPT range for a while, but once the EV thesis is accepted by the market, a spike in share price outside the linear BFPT path may not be a signal to sell, at least for long-term investors. It may be that all is well, the ship has found its course and is, once again, sailing in the right direction.

Yes, I agree that there are a few inflection points, but they are hard to navigate. One of the key dimensions of sentiment is how forward looking the market is willing to be. Is the market willing to fast forward and give Tesla huge credit for things the may materialize well into the future, or is it fixated on last quarters earnings? As long-term growth investors we are likely to focus on the longterm potential and underweight near term realities, but the market rarely holds that stance for long.

So let's think about the Model 3 unveiling and reservations. This could all prove quite extraordinary, the model is awesome and 500k reservations are taken in the first week. In this scenario, the stock goes wild and climbs to $405. The market is giving Tesla a ton of credit for what it thinks it can do in a couple of years. So here's the tough question: have we hit the inflection point? So the stock gets to $405 and people start to wonder where it will go from here. Is there much upside left or has have the next years of development already been baked into the price? At this point, the stock starts to pull back at least 30% and maybe as much as 50% if a couple of negative catalysts flare up along the way. So before you know it the stock has fallen from $419 back to $263. At this point do you still believe that the inflection point has come, or has it been delayed until Model 3 production begins? Well the stock CA arc up on that for awhile, then collapse as all the complexities of ramping up turn off impatient investors. So perhaps the inflection point will will come when some other milestone has come to pass, and on it goes.

Meanwhile, revenue has been climbing each quarter all along the way slowly shifting the fundamental support for the stock. So all along the low sentiment prices for the stock have been advancing. The ability to accumulate shares at low sentiment is really what gives the buy and hold investor the edge. Perhaps what we should do analytically is trace out the historical 5th percentile curve. It's the inflection points along that curve that are important.

All the best.

 

[EinSV]

Yes, I agree that there are a few inflection points, but they are hard to navigate. One of the key dimensions of sentiment is how forward looking the market is willing to be. Is the market willing to fast forward and give Tesla huge credit for things the may materialize well into the future, or is it fixated on last quarters earnings? As long-term growth investors we are likely to focus on the longterm potential and underweight near term realities, but the market rarely holds that stance for long.

So let's think about the Model 3 unveiling and reservations. This could all prove quite extraordinary, the model is awesome and 500k reservations are taken in the first week. In this scenario, the stock goes wild and climbs to $405. The market is giving Tesla a ton of credit for what it thinks it can do in a couple of years. So here's the tough question: have we hit the inflection point? So the stock gets to $405 and people start to wonder where it will go from here. Is there much upside left or has have the next years of development already been baked into the price? At this point, the stock starts to pull back at least 30% and maybe as much as 50% if a couple of negative catalysts flare up along the way. So before you know it the stock has fallen from $419 back to $263. At this point do you still believe that the inflection point has come, or has it been delayed until Model 3 production begins? Well the stock CA arc up on that for awhile, then collapse as all the complexities of ramping up turn off impatient investors. So perhaps the inflection point will will come when some other milestone has come to pass, and on it goes.

Meanwhile, revenue has been climbing each quarter all along the way slowly shifting the fundamental support for the stock. So all along the low sentiment prices for the stock have been advancing. The ability to accumulate shares at low sentiment is really what gives the buy and hold investor the edge. Perhaps what we should do analytically is trace out the historical 5th percentile curve. It's the inflection points along that curve that are important.

All the best.

JHM, I think your analysis above is spot on. I cannot predict whether the inflection point will happen at the launch, in 4-5 years or somewhere in between. And as you suggest we may not be able to confidently recognize it even when it does happen. I suppose that's why being a long-term investor suits me just fine!

And since the same inability to confidently call the inflection point is probably true for most investors, I can see why a simpler linear BFPT model may be a better (and certainly safer) bet for many, especially short-term investors.

Having said that, I do believe that if the Model 3 launch is successful -- and by successful I mean Tesla delivering a couple hundred thousand vehicles per year to happy customers at even a very modest gross margin -- we will see the inflection point. It could happen sooner (and will probably start to happen with the Model 3 launch), but the bears may not capitulate on the anti-EV thesis until the facts on the ground completely refute it. On the other hand, sometimes changes in thinking happen overnight and spread very quickly. When Audi representatives are saying "Tesla was right" it starts becoming harder and harder to make the anti-EV case with any credibility.

Although I cannot know when the inflection point will take place, my personal long-term investing thought process is guided by the belief that it will very likely happen sometime between now and 2020. There is no magic to that date but by then, even baking in some time for possible launch delays and the risk of a slower than expected ramp, we should be seeing high volumes of Model 3s in customers' hands. And hopefully, Tesla will have figured out how to do it while making at least a little bit of $. As with any company there will still be many risks to Tesla at that point, but the landscape should be very different in a way that most investors will recognize.

 

[jhm]

JHM, I think your analysis above is spot on. I cannot predict whether the inflection point will happen at the launch, in 4-5 years or somewhere in between. And as you suggest we may not be able to confidently recognize it even when it does happen. I suppose that's why being a long-term investor suits me just fine!

And since the same inability to confidently call the inflection point is probably true for most investors, I can see why a simpler linear BFPT model may be a better (and certainly safer) bet for many, especially short-term investors.

Having said that, I do believe that if the Model 3 launch is successful -- and by successful I mean Tesla delivering a couple hundred thousand vehicles per year to happy customers at even a very modest gross margin -- we will see the inflection point. It could happen sooner (and will probably start to happen with the Model 3 launch), but the bears may not capitulate on the anti-EV thesis until the facts on the ground completely refute it. On the other hand, sometimes changes in thinking happen overnight and spread very quickly. When Audi representatives are saying "Tesla was right" it starts becoming harder and harder to make the anti-EV case with any credibility.

Although I cannot know when the inflection point will take place, my personal long-term investing thought process is guided by the belief that it will very likely happen sometime between now and 2020. There is no magic to that date but by then, even baking in some time for possible launch delays and the risk of a slower than expected ramp, we should be seeing high volumes of Model 3s in customers' hands. And hopefully, Tesla will have figured out how to do it while making at least a little bit of $. As with any company there will still be many risks to Tesla at that point, but the landscape should be very different in a way that most investors will recognize.

We're on the same page. Another possibility that arises with something like the Model 3 launch is whether the longterm target will change. For example if response to Model 3 or Tesla Energy products were so strong that Musk starts talking about growing revenue at 65% for the next 10 years, then we get a whole new LTPT. An autonomous fleet service could also launch a whole new growth trajectory. This sort of thing creates an inflection point that is largely unanticipated. Being surprised is half the fun. Cheers.

 

[EinSV]

We're on the same page. Another possibility that arises with something like the Model 3 launch is whether the longterm target will change. For example if response to Model 3 or Tesla Energy products were so strong that Musk starts talking about growing revenue at 65% for the next 10 years, then we get a whole new LTPT. .

JHM, not to jump the gun or anything, but seems you hit the nail on the head here.

 

[neroden]

OK, so I'd like to get back to the LTPT. Your estimate is still based on translating Elon Musk's estimate of $700 billion market capin 2025 into a price target. ("Blind faith" refers to faith in Musk's estimate because Musk knows what he's talking about.) Assuming no siginficant dilution, this is a stock price of $5507 per share.

If we assume that Musk is too optimistic because he expects too high a P/E (20 is high for a car or battery company -- what if it gets priced at a P/E of 10 instead), so we suppose that that the market will price the stock at half that, we have an LTPT of $2753 per share.

Now let me ask you a question: I think you said that your model is quite insensitive to this level of variation in the LTPT. Is that right?

It does look pretty insensitive to it to me.

 

[jhm]

Here are the latest BFPTs. Still using $3590.45 as the LTPT. This is based on $9B revenue in 2016 that grows 50% annual each year thereafter. While the 325k M3 reservations are impressive, it is still not clear to me that Tesla will target substantially more than $20.25B in 2018 or $30.38B in 2019. Note that 150k Model S/X @ $100k plus 300k Model 3 @ $50k in 2019 is just $30B. This ignores Tesla Energy products. Basically I view developments with the Model 3 as consistent with the current LTPT, not as a radical revision to it.

Percentile Implied Discount 4/11/2016 1/20/2017 4/11/2017 1/19/2018 4/11/2018
24.60%......31.15% ..........$ 257 ....$ 317 ....$ 337 ....$ 415 ....$ 442
0%..........38.44% ..........$ 152 ....$ 195 ....$ 210 ....$ 270 ....$ 291
5%..........34.15% ..........$ 206 ....$ 259 ....$ 276 ....$ 347 ....$ 371
25%.........31.10% ..........$ 258 ....$ 318 ....$ 338 ....$ 417 ....$ 443
50%.........29.13% ..........$ 299 ....$ 364 ....$ 386 ....$ 470 ....$ 498
75%.........27.75% ..........$ 331 ....$ 401 ....$ 423 ....$ 512 ....$ 541
95%.........26.16% ..........$ 374 ....$ 449 ....$ 472 ....$ 566 ....$ 596
100%........25.01% ..........$ 409 ....$ 487 ....$ 511 ....$ 608 ....$ 639

So the current price is at the first quartile level. My 12 price target is in range of $338 and $386, the first and second quartiles.

PS. The upgraded TMC editor lacks a table building tool. So I apologize for the crummy table formatting.

 

[SW2Fiddler]

Basically I view developments with the Model 3 as consistent with the current LTPT, not as a radical revision to it.

I would venture to think that the "Model 3 development" heralded by the Earnings Report since has since then revised this just a smidge?

 

[jhm]

If anyone would like to propose a new LTPT based on Model 3 accelerated production, I'd like to entertain it.

My rough sense is that this moves up the revenue timeline maybe a year. It looks more impressive from a unit sales perspective than a revenue perspective.

So the LTPT is based on revenue in 2025. Currently, we are assuming about $346B in 2025. Accelerating Model 3 plus Tesla Energy could bump this up, but I'm not sure how to reset expectations around this. If we leave the LTPT where it is, the market can certainly reprice Tesla with a lower discount (higher current share price), thinking that $346B in 2025 is even more likely now, but so far the market is not moving that way.

 

[EinSV]

Whether or not there is a change to the LTPT since most of the analysts seem to be afraid to do any modeling based on Tesla's new projections I thought it would be a helpful exercise for forum members to share their own models/projections/back of the envelope calculations through 2020/2025 based on all the new info. Would be interesting to see how those compare to the $700B imarket cap in 2025 number used to calculate the original LTPT. I was planning to do this for my own purposes over the weekend.

 

[MitchJi]

PS. The upgraded TMC editor lacks a table building tool. So I apologize for the crummy table formatting.

You could post a screenshot of a table or a spread sheet.

 

[EinSV]

Nice to "see" you the other day on the short-term thread.

Congrats on Ron Baron adopting the $700 billion market cap target, which I think is still the basis for your LTPT.

Tesla Will Become a $700 Billion Gorilla, Top Investor Suggests

While I always think it is best to trust your own judgment, a little outside validation is nice!

 

[palmer_md]

This thread has been pretty quiet lately. The current share price probably indicates a very strong buy with this model.

 

[ken830]

Doesn't the model need to be updated now that the SolarCity acquisition is approved? Or does the "blind faith" part assume Elon already takes into account these types of activities in his original market cap estimate?

 

[Crowded Mind]

@jhm hasn't been online since 9/26. Hopefully he's alright.