Blind Faith Price Targets

[jhm]

Thanks, that's a nice tip.

BTW, I wrote that post on my phone TWICE. I was nearly done, and the web page got refreshed, which wiped it all out. So I wrote it a second time.

 

[adiggs]

Logistic Growth Model for Revenue

...

The logit transform is a convenient way to map from fractions to linear growth along the real line. Specifically, the transform is

Logit(S) = ln(S /(U - S))

And linear growth in the logit space is

Logit(S(t)) = a + b (t-T).

We can determine the intercept and slope if we know or assume two points.

The most recent historical is

Logit(S(2016)) = ln(0.000090 / (0.012 - 0.000090))

Thus, a = -4.8856

Based on our LTPT assumption of 50% annualized revenue growth, we have the next assumed point.

R (2027) = $605.48B
G(2027) = $77.8T
S (2027) = 0.5622%
Logit(S(2027) = -0.1261

From our linear assumption we get

11b = Logit(S(2027)) - Logit(S(2016)) = 4.7595

Thus, b = 0.432685.

This measures how quickly we progress a long the logit scale, but we need to invert this transform to get back to market share. Thus,

S(t) = U × exp(a+b (t-T)) / (1+ exp(a+b (t-T)))

This is called the logistic curve, or S curve.

....

As somebody who has, on occasion, attempted to explain logistic regression to others (and to myself!), this is about the best explanation I've ever encountered - in a text book, on Wikipedia, anywhere. The next time I find myself preparing to explain it to somebody (and myself again), I'll be coming back to this post

Thanks @jhm!

(One of my sins in life was to create an introductory class on data mining for business professionals and non-practitioners. Somebody ALWAYS asks how logistic regression works. My own answer leaves me unsatisfied.)

 

[jhm]

As somebody who has, on occasion, attempted to explain logistic regression to others (and to myself!), this is about the best explanation I've ever encountered - in a text book, on Wikipedia, anywhere. The next time I find myself preparing to explain it to somebody (and myself again), I'll be coming back to this post

Thanks @jhm!

(One of my sins in life was to create an introductory class on data mining for business professionals and non-practitioners. Somebody ALWAYS asks how logistic regression works. My own answer leaves me unsatisfied.)

Thanks!

With logistic regression you have the issue of trying to model a binomial response, which complicates things a bit. The underlying logistic growth curve is simpler without this. If you are modeling something like the market share of EVs over time, this is not really a binomial response. You can apply the logit transform to market share and plot this against time. In the logit space you can apply ordinary linear regression to estimate the linear growth coefficients. In my example above I simply assumed two points and fit the line, but if you have a longer historical time series you can estimate coefficients from that. I would think this would be very helpful for business data mining.

In fact here is a little dataset for EV share of the global auto market:

Year    EVShare    EVLogit    DeltaLogit
2010    0.01%     -9.2102 
2011    0.07%     -7.2637     1.9465
2012    0.17%     -6.3754     0.8883
2013    0.25%     -5.9890     0.3865
2014    0.38%     -5.5689     0.4200
2015    0.62%     -5.0770     0.4920
2016    0.86%     -4.7474     0.3296

If you plot out the logit scores, you can see that all but the first two years fit on a nice strait line. DeltaLogit is the annual increase in logit. From 2012 to 2016, this average growth is 0.4070 per year. So 50% EV share is when logit = 0, and this is about 11.66 = 4.7474/0.4070 years past 2016, between 2027 and 2028. One can play around with all sort of regression models to forecast this out, but so long as the average growth rate remains above 0.3956, then EV dominance happens by 2020. It is also helpful to think through what might change this rate in the future.

If I were teaching a introductory data mining class, I might have student play with this. We've all seen that chart that shows technology adoption curves for things like TVs and dishwashers. I wish someone would transform that to the logit scale to show just how linear this stuff can be. You would also get a good feel for typical annual growth rates in the logit scale. The larger the growth rate, the more rapid the transition.

 

[jhm]

Just a little refresh for those tracking this big movement. The current price $313 is at the 32nd percentile.

Percentile    Implied Discount    2017-07-06    2017-12-31    2018-07-06    2018-12-31    2019-12-31    2020-12-31
31.7%    26.21%     $313      $351      $395      $443      $559      $705
0%    31.10%     $210      $240      $275      $314      $412      $541
10%    28.67%     $256      $289      $329      $372      $479      $616
25%    27.13%     $290      $326      $369      $415      $527      $671
50%    25.29%     $338      $377      $424      $473      $592      $743
75%    23.58%     $391      $433      $483      $535      $661      $818
90%    22.69%     $421      $465      $517      $571      $701      $860
100%    20.92%     $490      $538      $593      $651      $787      $952

So we are starting to get into some prices that are really good for long-term accumulation.

 

[ValueAnalyst]

Just a little refresh for those tracking this big movement. The current price $313 is at the 32nd percentile.

Percentile    Implied Discount    2017-07-06    2017-12-31    2018-07-06    2018-12-31    2019-12-31    2020-12-31
31.7%    26.21%     $313      $351      $395      $443      $559      $705
0%    31.10%     $210      $240      $275      $314      $412      $541
10%    28.67%     $256      $289      $329      $372      $479      $616
25%    27.13%     $290      $326      $369      $415      $527      $671
50%    25.29%     $338      $377      $424      $473      $592      $743
75%    23.58%     $391      $433      $483      $535      $661      $818
90%    22.69%     $421      $465      $517      $571      $701      $860
100%    20.92%     $490      $538      $593      $651      $787      $952

So we are starting to get into some prices that are really good for long-term accumulation.

Do you still assume 7-10% annual dilution?

How does this table look if you plug in 0% dilution?

 

[jhm]

Do you still assume 7-10% annual dilution?

How does this table look if you plug in 0% dilution?

We haven't changed the LTPT yet, still $3600 by end of 2027.

When I get access to my spreadsheet, I can run some alternatives for you.

 

[adiggs]

Do you still assume 7-10% annual dilution?

How does this table look if you plug in 0% dilution?

One observation about dilution - whether Tesla is doing additional secondary offerings or not, one of a few things will be true:
- Tesla continues to dilute at some pace exactly equal to the rate at which Tesla issues options to employees.
- Tesla stops issuing options as part of it's compensation program.
- Tesla begins a share buyback program designed to counteract the effect of issuing options as part of it's compensation package.

I haven't looked at the quarterly or annual financials to figure out whether there is enough information present to calculate the rate at which shares are being issued, and thereby come up with an estimate for dilution solely based on employee comp. Presumably a reasonable estimate can be formulated - it clearly hasn't been 0 to-date, and I'd be shocked if Tesla were to get to 0% by ceasing the use of stock options.


In fact, I can readily see the first priority for Tesla when it starts to return cash to shareholders, being a buyback program sized and designed to offset any further dilution due to stock option issuance. Until that day, the exercise of options is good for a steady supply of cash for the company (even if each option represents a share of stock sold at some discount to the market price at that point in time, and likely to be a VERY LARGE discount).

 

[ValueAnalyst]

One observation about dilution - whether Tesla is doing additional secondary offerings or not, one of a few things will be true:
- Tesla continues to dilute at some pace exactly equal to the rate at which Tesla issues options to employees.
- Tesla stops issuing options as part of it's compensation program.
- Tesla begins a share buyback program designed to counteract the effect of issuing options as part of it's compensation package.

I haven't looked at the quarterly or annual financials to figure out whether there is enough information present to calculate the rate at which shares are being issued, and thereby come up with an estimate for dilution solely based on employee comp. Presumably a reasonable estimate can be formulated - it clearly hasn't been 0 to-date, and I'd be shocked if Tesla were to get to 0% by ceasing the use of stock options.


In fact, I can readily see the first priority for Tesla when it starts to return cash to shareholders, being a buyback program sized and designed to offset any further dilution due to stock option issuance. Until that day, the exercise of options is good for a steady supply of cash for the company (even if each option represents a share of stock sold at some discount to the market price at that point in time, and likely to be a VERY LARGE discount).

#1 will be true for the next three to five years, but it's important to look at the employee stock option expense in terms of absolute numbers, rather than a percentage.

So if, say, employee option expense approximates $1B total annual today (2% of today's market cap), it will maybe go to $2B by 2025 (less than 0.5% of say $500B market cap) as the company adds employees (but mostly lower level vs. higher level managers and senior executives who get a big chunk of these options). It won't jump to $10B as the company's market cap jumps 10x by 2025 (I expect sooner).

After 2020/21, the company should be able to institute a share buyback program to offset the dilution.

 

[jhm]

Let's see if we can model earnings as a function of revenue, revenue growth, and recent earnings. Now if we have a compelling basis for modeling near term earnings, that can be utilized. What we are after is a smooth transition to long term profitability out past current visibility.

So we need to add some notation to what we developed in a previous post.

E(t) is earnings in year t
h(t) = R(t+1)/R(t)-1, forward revenue growth
p(t) = E(t)/R(t), net income rate

We will start with
E(2016) = $675M
R(2016) = $7.00B, R(2017) = $11.07B
h(2016) = 58.12%
p(2016) = -9.64%

And we will assume long term
h(2100) = g = 3%
p(2100) = 10%

We already have a method for generating the revenue curve, R. So now the question is how to smoothly transition profitability to long run assumptions.

In my view, Tesla is unprofitable simply because it is growing revenue very fast. If you are growing say 50%/y, you need to spend considerable resources in advance of that growth in revenue. Some of this is accounted for as capital investments, but not all. R&D, staffing up and management burdened with growth all hit current expenses well in advance of incremental revenue. Hence, I prose that earnings can be modeled on the basis of current revenue and incremental revenue in the coming year. Thus,

E(t) = a R(t) - b (R(t+1)-R(t))

Dividing both sides by current revenue, leads to this simplification:

p(t) = a - b h(t)

We can solve for these two parameters as follows:

b = -(p(s) - p(t))/(h(s) - h(t))
a = p(t) + b h(t)

Thus, from our data and assumptions above, we obtain:

p = 0.1107 - 0.3563 h

This equation expresses the notion that growth is a drag on profitability. Notably we can determine the rate of revenue growth that would be profit neutral. By these estimates, Tesla is profitable when growth is less than 31.07% = 0.1107/0.3563.

We obtain the following curves:

 Year Rev $B Fwd Growth Profit Earn $B
2016 7.00 58.1% -9.64% -0.67
2017 11.07 57.8% -9.52% -1.05
2018 17.46 57.3% -9.33% -1.63
2019 27.46 56.5% -9.06% -2.49
2020 42.98 55.3% -8.64% -3.71
2021 66.75 53.6% -8.04% -5.37
2022 102.55 51.2% -7.18% -7.37
2023 155.09 47.9% -6.01% -9.33
2024 229.45 43.7% -4.49% -10.31
2025 329.66 38.5% -2.64% -8.70
2026 456.50 32.6% -0.56% -2.56
2027 605.48 26.6% 1.58% 9.55
2028 766.79 21.0% 3.58% 27.45
2029 927.97 16.2% 5.30% 49.19
2030 1078.19 12.3% 6.68% 71.97
2031 1211.14 9.4% 7.71% 93.36
2032 1325.37 7.3% 8.45% 112.00
2033 1422.76 5.9% 8.97% 127.57
2034 1506.72 4.9% 9.32% 140.38
2035 1580.80 4.3% 9.55% 150.99
2036 1648.13 3.8% 9.71% 159.98
2037 1711.14 3.5% 9.81% 167.84
2038 1771.66 3.3% 9.88% 174.96
2039 1831.00 3.2% 9.92% 181.62
2040 1890.09 3.1% 9.95% 188.01
2041 1949.58 3.1% 9.97% 194.29
2042 2009.94 3.1% 9.98% 200.55
2043 2071.49 3.0% 9.99% 206.85
2044 2134.47 3.0% 9.99% 213.25
2045 2199.06 3.0% 9.99% 219.77
2046 2265.41 3.0% 10.00% 226.45
2047 2333.62 3.0% 10.00% 233.30
2048 2403.80 3.0% 10.00% 240.34
2049 2476.02 3.0% 10.00% 247.58
2050 2550.38 3.0% 10.00% 255.02

A curious implication of this model is that Tesla remains unprofitable through 2026. This is a consequence of continuing to grow revenue faster than 31%/y.


We could modify the estimates such that long term profit is achieved by 2030 or other date. This blows up the real long term as we will see.

Assuming p(2030) = 10% leads to:

p = 0.1529 - 0.4289 h

 Year Rev $B Fwd Growth Profit Earn $B
2016 7.00 58.1% -9.64% -0.67
2017 11.07 57.8% -9.49% -1.05
2018 17.46 57.3% -9.27% -1.62
2019 27.46 56.5% -8.94% -2.45
2020 42.98 55.3% -8.44% -3.63
2021 66.75 53.6% -7.71% -5.15
2022 102.55 51.2% -6.68% -6.86
2023 155.09 47.9% -5.27% -8.18
2024 229.45 43.7% -3.44% -7.90
2025 329.66 38.5% -1.21% -4.00
2026 456.50 32.6% 1.29% 5.89
2027 605.48 26.6% 3.86% 23.39
2028 766.79 21.0% 6.27% 48.10
2029 927.97 16.2% 8.35% 77.45
2030 1078.19 12.3% 10.00% 107.82
2031 1211.14 9.4% 11.24% 136.17
2032 1325.37 7.3% 12.14% 160.86
2033 1422.76 5.9% 12.76% 181.52
2034 1506.72 4.9% 13.18% 198.58
2035 1580.80 4.3% 13.46% 212.81
2036 1648.13 3.8% 13.65% 224.95
2037 1711.14 3.5% 13.77% 235.66
2038 1771.66 3.3% 13.85% 245.41
2039 1831.00 3.2% 13.90% 254.59
2040 1890.09 3.1% 13.94% 263.46
2041 1949.58 3.1% 13.96% 272.18
2042 2009.94 3.1% 13.98% 280.90
2043 2071.49 3.0% 13.98% 289.69
2044 2134.47 3.0% 13.99% 298.63
2045 2199.06 3.0% 13.99% 307.75
2046 2265.41 3.0% 14.00% 317.10
2047 2333.62 3.0% 14.00% 326.68
2048 2403.80 3.0% 14.00% 336.53
2049 2476.02 3.0% 14.00% 346.66
2050 2550.38 3.0% 14.00% 357.09

So I'll leave this here for discussion. The obvious next step is to discount earnings. But first it is good to pause and reflect. What do we think about the prospect of unprofitable growth for so long? Is the growth worth it? Perhaps another decade of negative earnings has something to do with dilution.

 

[Intl Professor]

I'm cheered by the great talent and optimism of this thread. I worry that the fine modeling here of world GDP does not sufficiency account for the economic costs of global warming which are vast and quite clear to most of us at TMC. Frankly, I think it is too late to save us from the overwhelming consequence of the temperature increases. I have little evidence for this but even the climate scientists seem to be revising their estimates upwards and the policy non-response or negative response by "leadership" in this country is appalling.

The proper response is to take responsibility for ourselves since politicians are so cheaply bought and shown here is the economic evidence money talks for business and consumers too. But is rational economic evidence enough saving in actual temperature mitigation compared to the costs of seawalls, war due to immigration from the sea, etc., etc.?

 

[jhm]

I'm cheered by the great talent and optimism of this thread. I worry that the fine modeling here of world GDP does not sufficiency account for the economic costs of global warming which are vast and quite clear to most of us at TMC. Frankly, I think it is too late to save us from the overwhelming consequence of the temperature increases. I have little evidence for this but even the climate scientists seem to be revising their estimates upwards and the policy non-response or negative response by "leadership" in this country is appalling.

The proper response is to take responsibility for ourselves since politicians are so cheaply bought and shown here is the economic evidence money talks for business and consumers too. But is rational economic evidence enough saving in actual temperature mitigation compared to the costs of seawalls, war due to immigration from the sea, etc., etc.?

According to Statoil economist, oil needs to peak by 2023 to stay on course for 2 degrees of warming. Energy driven carbon emissions seem to be leveling out, but I estimate that emissions need to fall 5.6% each year to limit carbon to 450 ppm. I discuss these issues in the Shorting Oil thread. These issues deserve discussion, fine modeling and analysis. That's why we have a thread on shorting oil, which is really about when the industry will go into terminal decline.

 

[jhm]

Additionally, their is a very interesting discussion to be had about the impact of Tesla's success on global GDP. When you contemplate the potential for Tesla revenue to exceed 1% of global GDP, this is bound to have some impact on the growth of GDP. So it is very tricky to forecast what GDP growth may look like two decades out.

Here are some potential impacts of Tesla's success on global GDP.

• Cost of energy declines, which would boost productivity, reduction of energy poverty.
• Cost of land transport declines, increased mobility, increased productivity.
• Land transport becomes more autonomous and safer, improved health outcomes, better logistics.
• Emissions decline, reduced cost of mitigating climate change risks, improved health outcomes.

In short the global economy could grow faster than under the age of oil. Energy will be much more democratic and less hazardous to health and the environment. If the world fails to halt climate change, OTOH, more of the economy must be spent on mitigating the effects of climate change. This would be a huge weight on the economy and likely reduce GDP growth for quite a long time.

So I'd much rather live in a world where renewable energy and EVs succeed than where the fossil industries choke off the health and productivity of the planet. I think it really does make a long term difference to global GDP and practically everything else.

 

[neroden]

I'm cheered by the great talent and optimism of this thread. I worry that the fine modeling here of world GDP does not sufficiency account for the economic costs of global warming which are vast and quite clear to most of us at TMC.

GDP is kind of ***ing whacked. It calculates smashing windows and then repairing them as economic activity. Although global warming will be disastrous to the world, the panicked attempts to repair a little of the damage are going to increase calcuated GDP.

So, basically, the real question is, will humanity be so busy trying to build seawalls etc. that nobody will buy cars any more? (Having better things to use their time and money on than cars?) That's a very real possibility, though people seem to like cars so much that I am guessing not.

The other lines of business are stronger in this scenario -- I do think that the solar power business and the battery business are likely to actually boom as people attempt to deal with the global warming disasters, because (if you're not on the flooded coast and you're not in the flaming hot areas) they provide local sustainability and independence from political turmoil.

 

[Psimmons]

@jhm What program are you using to generate these figures? I find this approach to estimating future value really interesting. Any chance you could send me some example code if you are running this through a statistical software?

Thanks.

 

[jhm]

@jhm What program are you using to generate these figures? I find this approach to estimating future value really interesting. Any chance you could send me some example code if you are running this through a statistical software?

Thanks.

I'm just using an Excel spreadsheet. Try your hand at it. I'm happy to clarify how the calculations work. That usually helps everyone understand it better.

 

[jhm]

So let's finish off this long term model. We have modeled revenue and earning out to the end of the century. The final step is to determine a reasonable discount rate and compute the value of the company and a share.

The standard approach of most stock analysts is determine a discount rate based on comparable risk. CAPM models discount based on the risk free rate, the long term rate of return on stocks and beta, the regression coefficient with a market index as an explanatory variable. CAPM is unlikely to be satisfying for a truly long term model because we have no idea what beta may be for Tesla 10 or more years out. Furthermore, Tesla is a stock with low R-squared, meaning it has high volatility that is not explained by movement in the general market. Thus, beta will likely understate just how volatile or risky Tesla is, and CAPM would lead to a discount that is too low.

Another approach is to assume some long term PE ratio. Specifically we are thinking about a massive corporation that can only grow as fast as the global economy. Lets suppose that a 12.5 PE ratio is suitable.

We have a terminal value model:

V(2100) = E(2100)/(d-g)

Thus, the long term PE ratio is 1/(d-g), and we derive

d = g + E(2100)/V(2100) = 3% + 1/12.5 = 11%

I don't recommend this discount, but let's see where this leads.

Finally, the firm value can be determined for any year by means of backwards induction. Specifically,

V(t) = E(t) + V(t+1)/(1+d)

So here are the results assuming d=11% and ultimate share u=1.2%.

Year    Rev$B    FwdGrowth    Profit    Earn$B    Value$B    Stock$
2016    7.00    58.1%    -9.64%    -0.68    404    2,462
2017    11.07    57.8%    -9.52%    -1.05    450    2,737
2018    17.46    57.3%    -9.33%    -1.63    500    3,045
2019    27.46    56.5%    -9.06%    -2.49    557    3,391
2020    42.98    55.3%    -8.64%    -3.71    621    3,781
2021    66.75    53.6%    -8.04%    -5.37    694    4,222
2022    102.55    51.2%    -7.18%    -7.37    776    4,723
2023    155.09    47.9%    -6.01%    -9.33    869    5,292
2024    229.45    43.7%    -4.49%    -10.31    975    5,937
2025    329.66    38.5%    -2.64%    -8.70    1,094    6,660
2026    456.50    32.6%    -0.56%    -2.56    1,224    7,451
2027    605.48    26.6%    1.58%    9.55    1,361    8,288
2028    766.79    21.0%    3.58%    27.45    1,501    9,136
2029    927.97    16.2%    5.30%    49.19    1,635    9,955
2030    1078.19    12.3%    6.68%    71.97    1,760    10,718
2031    1211.14    9.4%    7.71%    93.36    1,874    11,410
2032    1325.37    7.3%    8.45%    112.00    1,977    12,035
2033    1422.76    5.9%    8.97%    127.57    2,070    12,601
2034    1506.72    4.9%    9.32%    140.38    2,156    13,126
2035    1580.80    4.3%    9.55%    150.99    2,237    13,621
2036    1648.13    3.8%    9.71%    159.98    2,316    14,099
2037    1711.14    3.5%    9.81%    167.84    2,393    14,568
2038    1771.66    3.3%    9.88%    174.96    2,470    15,037
2039    1831.00    3.2%    9.92%    181.62    2,547    15,509
2040    1890.09    3.1%    9.95%    188.01    2,626    15,987
2041    1949.58    3.1%    9.97%    194.29    2,706    16,475
2042    2009.94    3.1%    9.98%    200.55    2,788    16,975
2043    2071.49    3.0%    9.99%    206.85    2,872    17,487
2044    2134.47    3.0%    9.99%    213.25    2,959    18,012
2045    2199.06    3.0%    9.99%    219.77    3,047    18,553
2046    2265.41    3.0%    10.00%    226.45    3,139    19,108
2047    2333.62    3.0%    10.00%    233.30    3,233    19,680
2048    2403.80    3.0%    10.00%    240.34    3,329    20,268
2049    2476.02    3.0%    10.00%    247.58    3,429    20,874
2050    2550.38    3.0%    10.00%    255.02    3,531    21,497

So here is a valuation that is sure to put a smile on faces, if not a snicker. Note that with an 11% gaining 1.2% of GDP is irresistibly valuable even after waiting 10 years to become profitable.

This should strike us as too good too be true, and it is. For one thing, we are not assuming any dilution of shares. We simply divide Value in $B by 164.26M shares. But in my view the primary problem with it is that the market simply discounts these potential earnings more more severely than 11%.

Ultimately, it is the market's unique job to place a value on all potential future earnings. A company with the sort of potential that Tesla has is a truly rare and extraordinary thing, and this is why comparative approaches will fall. The market values and discounts Tesla in a very unique way. Even if our revenue and earnings trajectories were spot on, the maker will not discount Tesla's future earning the same way it discount those of GM, IBM or Exxon. So let's allow the market to tell us how it discounts these potential earning. This is an approach called calibration to market prices.

Specifically, I find that a discount of 21.1% leads to a current share price of $330. Here it is. (u=1.2%)

Year    Rev$B    FwdGrowth    Profit    Earn$B    Value$B    Stock$
2016    7.00    58.1%    -9.64%    -0.68    44    269
2017    11.07    57.8%    -9.52%    -1.05    54    330
2018    17.46    57.3%    -9.33%    -1.63    67    408
2019    27.46    56.5%    -9.06%    -2.49    83    506
2020    42.98    55.3%    -8.64%    -3.71    104    631
2021    66.75    53.6%    -8.04%    -5.37    130    792
2022    102.55    51.2%    -7.18%    -7.37    164    998
2023    155.09    47.9%    -6.01%    -9.33    207    1,263
2024    229.45    43.7%    -4.49%    -10.31    263    1,598
2025    329.66    38.5%    -2.64%    -8.70    330    2,012
2026    456.50    32.6%    -0.56%    -2.56    411    2,500
2027    605.48    26.6%    1.58%    9.55    500    3,047
2028    766.79    21.0%    3.58%    27.45    595    3,619
2029    927.97    16.2%    5.30%    49.19    687    4,181
2030    1078.19    12.3%    6.68%    71.97    772    4,700
2031    1211.14    9.4%    7.71%    93.36    848    5,161
2032    1325.37    7.3%    8.45%    112.00    914    5,562
2033    1422.76    5.9%    8.97%    127.57    971    5,910
2034    1506.72    4.9%    9.32%    140.38    1,021    6,216
2035    1580.80    4.3%    9.55%    150.99    1,067    6,493
2036    1648.13    3.8%    9.71%    159.98    1,109    6,750
2037    1711.14    3.5%    9.81%    167.84    1,149    6,994
2038    1771.66    3.3%    9.88%    174.96    1,188    7,233
2039    1831.00    3.2%    9.92%    181.62    1,227    7,469
2040    1890.09    3.1%    9.95%    188.01    1,266    7,706
2041    1949.58    3.1%    9.97%    194.29    1,305    7,946
2042    2009.94    3.1%    9.98%    200.55    1,345    8,190
2043    2071.49    3.0%    9.99%    206.85    1,386    8,440
2044    2134.47    3.0%    9.99%    213.25    1,428    8,695
2045    2199.06    3.0%    9.99%    219.77    1,471    8,958
2046    2265.41    3.0%    10.00%    226.45    1,516    9,228
2047    2333.62    3.0%    10.00%    233.30    1,561    9,505
2048    2403.80    3.0%    10.00%    240.34    1,608    9,791
2049    2476.02    3.0%    10.00%    247.58    1,657    10,085
2050    2550.38    3.0%    10.00%    255.02    1,706    10,388

So now we get to a stock price trajectory that seems plausible, and we don't need to make assumptions about share dilution to get there. The reason why is that calibration already takes into account the potential for dilution as well; it is baked into the stick price as well as the implied discount.

So $631 in 2020, $2012 in 2025, and $4700 in 2030 all seem plausible and consistent with our long term assumptions. So let's see what happens when we vary out assumption about long term market share.

Assuming ultimate share u=0.8% calibrates to discount d=21.55%. This actually does not impact stock value very much. It's $641 in 2020, $1968 in 2025, and $3514 in 2030. Thus, the ultimate share only matters past 2025. Here are the details.

Year    Rev$B    FwdGrowth    Profit    Earn$B    Value$B    Stock$
2016    7.00    66.2%    -9.64%    -0.68    44    268
2017    11.63    65.4%    -9.42%    -1.10    54    330
2018    19.24    64.3%    -9.07%    -1.75    67    410
2019    31.62    62.6%    -8.53%    -2.70    84    511
2020    51.42    60.0%    -7.72%    -3.97    105    641
2021    82.26    56.2%    -6.54%    -5.38    133    809
2022    128.49    51.0%    -4.93%    -6.34    168    1,023
2023    194.03    44.5%    -2.89%    -5.61    212    1,290
2024    280.29    36.9%    -0.55%    -1.54    264    1,610
2025    383.78    29.2%    1.85%    7.12    323    1,968
2026    495.82    22.1%    4.05%    20.10    384    2,339
2027    605.48    16.3%    5.87%    35.53    443    2,695
2028    704.09    11.9%    7.24%    50.96    495    3,012
2029    787.77    8.8%    8.20%    64.63    540    3,285
2030    856.90    6.7%    8.85%    75.88    577    3,514
2031    914.16    5.3%    9.28%    84.83    609    3,710
2032    962.78    4.4%    9.55%    91.95    638    3,882
2033    1005.59    3.9%    9.72%    97.75    663    4,038
2034    1044.80    3.6%    9.83%    102.67    687    4,185
2035    1081.95    3.3%    9.89%    107.04    711    4,327
2036    1118.12    3.2%    9.93%    111.08    734    4,467
2037    1154.04    3.1%    9.96%    114.94    757    4,608
2038    1190.16    3.1%    9.97%    118.72    780    4,750
2039    1226.83    3.0%    9.98%    122.49    804    4,896
2040    1264.24    3.0%    9.99%    126.30    829    5,044
2041    1302.55    3.0%    9.99%    130.18    854    5,197
2042    1341.87    3.0%    10.00%    134.14    879    5,353
2043    1382.29    3.0%    10.00%    138.20    906    5,514
2044    1423.85    3.0%    10.00%    142.37    933    5,680
2045    1466.63    3.0%    10.00%    146.65    961    5,851
2046    1510.67    3.0%    10.00%    151.06    990    6,026
2047    1556.01    3.0%    10.00%    155.60    1,020    6,207
2048    1602.71    3.0%    10.00%    160.27    1,050    6,393
2049    1650.80    3.0%    10.00%    165.08    1,082    6,585
2050    1700.33    3.0%    10.00%    170.03    1,114    6,783

For ultimate share U=1.6%, calibrated discount is d=21.2%. So again we get similar results for share price, $631 in 2020, $2048 in 2025, and $5494 in 2030. The high ultimate share matters after 2025, but not so much before, and this is inspite of the fact that higher ultimate share anticipates a longer stretch of unprofitable growth. Here are the details.

Year    Rev$B    FwdGrowth    Profit    Earn$B    Value$B    Stock$
2016    7.00    55.5%    -9.64%    -0.68    44    268
2017    10.88    55.3%    -9.55%    -1.04    54    330
2018    16.90    54.9%    -9.43%    -1.59    67    408
2019    26.18    54.4%    -9.24%    -2.42    83    506
2020    40.43    53.7%    -8.96%    -3.62    104    631
2021    62.12    52.6%    -8.55%    -5.31    130    792
2022    94.78    51.0%    -7.96%    -7.54    164    999
2023    143.11    48.8%    -7.13%    -10.21    208    1,267
2024    212.93    45.8%    -6.02%    -12.82    265    1,611
2025    310.50    42.0%    -4.59%    -14.25    336    2,048
2026    440.87    37.3%    -2.85%    -12.55    425    2,588
2027    605.48    32.1%    -0.88%    -5.34    530    3,229
2028    799.75    26.6%    1.16%    9.31    649    3,954
2029    1012.61    21.4%    3.12%    31.62    776    4,724
2030    1229.12    16.8%    4.85%    59.62    902    5,494
2031    1435.17    13.0%    6.27%    89.98    1,022    6,219
2032    1621.32    10.0%    7.37%    119.45    1,129    6,875
2033    1784.04    7.9%    8.18%    145.92    1,224    7,452
2034    1924.38    6.3%    8.76%    168.55    1,307    7,957
2035    2045.97    5.2%    9.16%    187.46    1,380    8,402
2036    2153.16    4.5%    9.44%    203.23    1,446    8,801
2037    2250.06    4.0%    9.63%    216.58    1,506    9,169
2038    2340.08    3.7%    9.75%    228.18    1,563    9,516
2039    2425.86    3.4%    9.83%    238.58    1,618    9,852
2040    2509.34    3.3%    9.89%    248.19    1,672    10,181
2041    2591.95    3.2%    9.93%    257.32    1,726    10,510
2042    2674.72    3.1%    9.95%    266.19    1,781    10,842
2043    2758.39    3.1%    9.97%    274.97    1,836    11,178
2044    2843.47    3.1%    9.98%    283.75    1,892    11,521
2045    2930.36    3.0%    9.99%    292.63    1,950    11,871
2046    3019.36    3.0%    9.99%    301.66    2,009    12,231
2047    3110.68    3.0%    9.99%    310.88    2,070    12,600
2048    3204.50    3.0%    10.00%    320.32    2,132    12,980
2049    3300.97    3.0%    10.00%    330.01    2,196    13,370
2050    3400.23    3.0%    10.00%    339.96    2,262    13,772

So long as we calibrate the the model to recent market prices, near term valuations depend very little on the ultimate market share. Apparently, the market discounts the potential for great market share all the same. What seems to matter is market's willingness to discount near term losses in pursuit of extraordinary market share. So the interesting challenge is how this discount may change over time. Certainly, as Tesla becomes profitable or free cash flow positive, I do not expect that the discount would remain as high as 20%. I suspect that the market discount is linked to negative free cash flow. Thus, you cannot actually separate earnings from the discount of those earnings. They are intertwined, and the need for fresh capital is part of this.

Neverthess, with a model such as this, calibration does give us a way to track how the market is valuing Tesla's prospects. We see a path for growth and profitability. So it is helpful to mark the value of that path to market. If it is reasonable for the market to price Tesla today at $330/sh, then it will be just as reasonable for price to reach $631 by 2020. This is a near doubling in just three years. Tesla simply needs to stay on this path. If they move faster with fewer losses, they will advance along a more valuable path.

Reactions?

 

[neroden]

FWIW if you assumed a long run P/E of 5, you'd get roughly the same discount rate you find in your other calculations. That's a real pessimist's P/E ratio, historically speaking, it rarely gets lower than that for the general market.

 

[jhm]

FWIW if you assumed a long run P/E of 5, you'd get roughly the same discount rate you find in your other calculations. That's a real pessimist's P/E ratio, historically speaking, it rarely gets lower than that for the general market.

Indeed, that is why I'm thinking about a transition to a lower discount rate. Assuming a constant discount rate is problematic. You can get away with it if your DCF model only goes a few years out, but over several decades it can't quite be constant.

 

[jhm]

BFPT Update

While we have been having a wonderful discussion about how to approach the LTPT, I'll present current results based on our established method. I'll go ahead an present it under the options for dilution rate, 8%, 4% and 0%. The median BPFT for the end of 2020 under these options are $743, $899, and $1094, respectively. So I'll leave it to each of to decide which scenario we find most helpful. For me personally, I like the 8% dilution rate even if it is a bit conservative. There's nothing like a 20% pullback in the span of a week to help one appreciate a little bit of conservatism.

The good news is that $327 is at the 39th percentile, so there is plent of upside. The twelve month median BFPT is $427, and the first quartile is at $373, The 5th percentile is $313, so the opportunity to wait for a substantially better price is fairly thin. So $327 is a wonderful price at which to accumulate.

Keep the faith!

LTPT $3600, dilution 8%

Percentile    Implied Discount    2017-07-20    2017-12-31    2018-07-20    2018-12-31    2019-12-31    2020-12-31
39.1%    25.78%     $327      $363      $412      $457      $574      $723
0%       31.10%     $212      $240      $278      $314      $412      $541
5%       29.48%     $242      $272      $313      $352      $455      $590
25%      27.11%     $293      $327      $373      $415      $528      $671
50%      25.29%     $341      $377      $427      $473      $592      $743
75%      23.58%     $394      $433      $487      $535      $661      $818
95%      22.05%     $448      $490      $547      $599      $730      $892
100%     20.92%     $494      $538      $597      $651      $787      $952

LTPT $5450, dilution 4%

Percentile    Implied Discount    2017-07-20    2017-12-31    2018-07-20    2018-12-31    2019-12-31    2020-12-31
31.5%    30.87%     $327      $370      $429      $484      $633      $829
0%       35.93%     $220      $253      $299      $344      $467      $635
5%       34.32%     $249      $285      $335      $383      $514      $691
25%      31.79%     $304      $345      $401      $454      $598      $789
50%      29.36%     $370      $415      $478      $537      $695      $899
75%      27.51%     $430      $479      $548      $611      $779      $995
95%      25.87%     $492      $546      $619      $687      $865    $1,089
100%     24.75%     $540      $597      $674      $745      $929    $1,159

LTPT $8400, dilution 0%

Percentile    Implied Discount    2017-07-20    2017-12-31    2018-07-20    2018-12-31    2019-12-31    2020-12-31
28.5%    36.39%     $327      $376      $447      $513      $700      $956
0%       41.33%     $226      $264      $319      $373      $527      $745
5%       39.60%     $257      $298      $358      $416      $581      $812
25%      36.84%     $316      $364      $433      $498      $682      $934
50%      33.77%     $401      $457      $536      $611      $817    $1,094
75%      31.68%     $473      $535      $622      $704      $927    $1,222
95%      30.01%     $540      $608      $702      $790    $1,027    $1,337
100%     28.74%     $599      $671      $771      $863    $1,111    $1,432

 

[jhm]

The current price of $362 is near median discount. Looking forward 12 months with have median BFPT in range of $435 and $485. My sense is that anything below $350 is a good price to accumulate. It is not yet time to buy above $400. Patience, that will come next year.

Keep the faith!

LTPT $3600, dilution 8%

Percentile    Discount    2017-08-15    2017-12-31    2018-08-15    2018-12-31    2019-12-31    2020-12-31    2022-12-31    2025-12-31
55.2%    24.77%     $362      $393      $451      $491      $612      $765      $1,190      $2,313
0%    31.10%     $216      $240      $284      $314      $412      $541      $929      $2,095
5%    29.48%     $246      $272      $319      $352      $455      $590      $989      $2,148
25%    27.11%     $298      $327      $379      $415      $528      $671      $1,085      $2,229
50%    25.27%     $347      $378      $435      $474      $593      $744      $1,167      $2,295
75%    23.58%     $400      $433      $494      $535      $661      $818      $1,249      $2,358
95%    22.05%     $455      $490      $555      $599      $730      $892      $1,329      $2,418
100%    20.92%     $501      $538      $606      $651      $787      $952      $1,392      $2,463

LTPT $5450, dilution 4%

Percentile    Discount    2017-08-15    2017-12-31    2018-08-15    2018-12-31    2019-12-31    2020-12-31    2022-12-31    2025-12-31
44.5%    29.86%     $362      $399      $470      $519      $673      $875      $1,476      $3,235
0%    35.93%     $225      $253      $306      $344      $467      $635      $1,174      $2,952
5%    34.32%     $255      $285      $342      $383      $514      $691      $1,246      $3,023
25%    31.79%     $310      $345      $409      $454      $598      $789      $1,371      $3,140
50%    29.45%     $374      $412      $484      $534      $691      $895      $1,500      $3,255
75%    27.51%     $437      $479      $558      $611      $779      $995      $1,617      $3,355
95%    25.87%     $500      $546      $630      $687      $865      $1,089      $1,725      $3,443
100%    24.75%     $549      $597      $685      $745      $929      $1,159      $1,804      $3,505