Long-Term Fundamentals of Tesla Motors (TSLA)

[tftf]

The competition is so far behind that they will not be able to catch up any time soon. I guarantee you that Tesla will be the biggest car manufacturer in the world, and it will happen a lot sooner than you expect.
If you want to be successful in business, then you have to see the future, think big, and then execute: Bill Gates, Steve Jobs, Elon Musk, etc.
.

I don't think these predictions can be stated as a fact today, currently TSLA only produces a rounding error of worldwide cars. Toyota and VW Group will each produce about 10+ million cars a year by the time TSLA introduces its Gen III car in 2017.

More general, the IT and car industry can't be compared directly imho. The other two disruptors mentioned (Gates and Jobs) both worked in IT. In IT, you can scale up production and distribution very quickly, that's hard to do in the car sector, it will take TSLA years to scale production and add more factories. (In extreme cases, such as eletronic software, the marginal cost of another unit in manufacturing and distribution is close to zero or zero).

Even assuming everything goes great for TSLA (tech licensing, stationary batteries, Gen III introduction etc.) all these revenue streams are far in the future and have to be discounted to present value. Damodaran, a noted expert on company valuation, arrived at a valuation of $68 billion using his assumptions, in present value, that's "only" around $8-9 billion - right now TSLA's market cap is above 20 billion as we all know. For more details, see my entry here:

Short-Term TSLA Price Movements - Page 1055

 

[TSLAopt]

I don't think these predictions can be stated as a fact today, currently TSLA only produces a rounding error of worldwide cars. Toyota and VW Group will each produce about 10+ million cars a year by the time TSLA introduces its Gen III car in 2017.

More general, the IT and car industry can't be compared directly imho. The other two disruptors mentioned (Gates and Jobs) both worked in IT. In IT, you can scale up production and distribution very quickly, that's hard to do in the car sector, it will take TSLA years to scale production and add more factories. (In extreme cases, such as eletronic software, the marginal cost of another unit in manufacturing and distribution is close to zero or zero).

Even assuming everything goes great for TSLA (tech licensing, stationary batteries, Gen III introduction etc.) all these revenue streams are far in the future and have to be discounted to present value. Damodaran, a noted expert on company valuation, arrived at a valuation of $68 billion using his assumptions, in present value, that's "only" around $8-9 billion - right now TSLA's market cap is above 20 billion as we all know. For more details, see my entry here:

Short-Term TSLA Price Movements - Page 1055

tftf you must be one of those people who who couldn't envision Tesla being where they are at now 1 year ago. You were proved wrong. Now you don't believe Tesla will make the next steps to become the biggest car manufacturer in the world? You will be proved wrong again...these next steps in comparison will be much easier for them to overcome than everything they've overcome in the past 5 years.
As long as their product remains the best in the world I have no doubt they can execute to get where Sleepy says they go.
goodluck with your short position as us longs don't mind taking your money in the long run.

 

[tftf]

tftf you must be one of those people who who couldn't envision Tesla being where they are at now 1 year ago. You were proved wrong.

Believe it or not, I was long TSLA one year ago when it was trading below $30 (and don't regret selling when it reached my PT this year). I can switch my opinion depending on company valuation. This is not about me, however. Please take a look at the link and the numbers provided by Damodaran, few analysts did such a proper and detailed DCF analysis - and even provided for free to the general public. He also added general lessons and potential pitfalls regarding young companies:

Steering the discussion away from Tesla, this decomposition does provide some general lessons or propositions about investing in and valuing young companies.

1. Be wary of per share values: While equity research analysts and investors are fond of focusing on earnings per share and other per share metrics, you have to be cautious about any per share values with young, growth companies, where the share count is a moving target.
2. Forward values are misleading: Another favored technique used by analysts in valuing young, growth companies is to forecast out earnings in a future period and applying a multiple to these earnings to estimate a forward value. That forward value is often used to back out the return you will make if you invest in the company today, at its current value. This misses the dilution effect that is part of investing in a young, growth company and the potential for failure.

Musings on Markets: Many a slip between the cup & the lip: From forward value to value per share today

In contrast to me, he certainly has no incentive to "talk the stock down" as he states himself:

You may not believe me but I really have no desire to talk you out of investing in Tesla and I certainly have no interest in pushing the stock price down. If you do make the choice of investing in Tesla, though, I would like you to engage in this debate about value and think through the assumptions that you are making and whether you are comfortable with them. You don't have to convince me. All you have to do is convince yourself that you are making a good investment.

(quote from link above)

Anyway, whenever I'm long I read what the shorts have to say and vice-versa. So I spent some time on this forum and presented my views.

 

[dha]

tftf you must be one of those people who who couldn't envision Tesla being where they are at now 1 year ago. You were proved wrong. Now you don't believe Tesla will make the next steps to become the biggest car manufacturer in the world? You will be proved wrong again...these next steps in comparison will be much easier for them to overcome than everything they've overcome in the past 5 years.
As long as their product remains the best in the world I have no doubt they can execute to get where Sleepy says they go.
goodluck with your short position as us longs don't mind taking your money in the long run.

I am long Tesla. TSLA is nearly 100% of my portfolio and I believe they have a shot at being the world's largest automaker. From where I sit, tftf was merely pointing out that this outcome is not a certainty. And guess what, it's not. A lot can happen between now and 2018, much as I believe in Tesla and believe they can keep up the jaw-dropping execution.

I don't think it's constructive to jump down the throat of anyone who has a differing take on Tesla's prospects. I, for one, would prefer a forum where we could exchange differing opinions civilly.

 

[JRP3]

Believe it or not, I was long TSLA one year ago when it was trading below $30 (and don't regret selling when it reached my PT this year).

You don't regret missing out on huge gains? I've seen other former longs who bailed out too soon and can't come to terms with what the stock has been doing, and will do in the future.

 

[tftf]

From where I sit, tftf was merely pointing out that this outcome is not a certainty. And guess what, it's not. A lot can happen between now and 2018, much as I believe in Tesla and believe they can keep up the jaw-dropping execution.
I don't think it's constructive to jump down the throat of anyone who has a differing take on Tesla's prospects. I, for one, would prefer a forum where we could exchange differing opinions civilly.

Exactly, I was simply trying to explain a different viewpoint using numbers: Damodaran is an independent academic (not a short-seller) and a noted expert on company valuation. I think it would be useful to have a detailed look at his blog entries, some people may not be familiar with the follow-up entry Damodaran wrote a few days after his initial two blog entries on TSLA, it's linked above.

I was not here to pick fights. On a "fan" forum such as this one, I assume 90%+ of people are probably long TSLA, however: This can lead to a dangerous herd thinking and over-optimistic group mentality regarding TSLA's valuation and outlook, especially after the run TSLA already had in 2013.

It may be useful to hear a dissenting voice. Damodaran (which I frequently linked here) knows a thing or two about valuation. This doesn't mean you have to follow him (or anyone else) blindly - but I think he presented more useful number crunching and deeper analysis than most analysts covering TSLA's valuation - long or short. And it's all available for free on his blog. But apparently that's "trolling". Does this mean Professor Damodaran is (also) a troll, since I'm just linking to his numbers ?

With that said and no intention to start arguments: 42 entries were enough to present my points and point to a few links with (imho) red flags regarding TSLA's current market valuation. So long and thanks for all the fish arguments! We will see in a few year.

PS: @JRP3. I have been in the markets long enough not to get emotional over trading or investment opportunities. I never marry a stock, a new opportunity comes along each and every day in the markets.

PPS: @PeterJA. I was just pointing out size and production differences in the car market, not implying TSLA would be the largest manufacturer by 2017. I know that's impossible, in fact that is one my arguments: the car market is very different than, say, the IT market where a disruptor such as GOOG or AAPL can disrupt the sector in just 3-5 years with a new search engine or mobile phone. For example, it took all the Japanese and Korean car manufacturers aggregated (even with hidden and open subsidies from the governments in Japan and South Korea!)a few decades, not just a few years, to mount a successful assault on Detroit...

2000: GOOG marketshare in search engines
2005: GOOG marketshare in search engines

2008: AAPL marketshare in smartphones
2013: AAPL marketshare in smarthones

2013: TSLA marketshare in cars
2018: TSLA marketshare in cars

I will let you fill in the numbers...

@PeterJA: Regarding the $68 billion and cost of capital. I already noted above why I think Damodaran's default cost of capital numbers are appropriate and the low 1.5% yield in May 2013 was only possible because the yield was linked to a convertible bond, not a "normal" corporate bond, again here:

Short-Term TSLA Price Movements - Page 1055

 

[PeterJA]

tftf, I don't follow your logic. You quoted Sleepy saying: "Tesla will be the biggest car manufacturer in the world, and it will happen a lot sooner than you expect."

You disagreed, using the following arguments:

currently TSLA only produces a rounding error of worldwide cars.

as if Tesla's current size is somehow relevant to its potential size.

Toyota and VW Group will each produce about 10+ million cars a year by the time TSLA introduces its Gen III car in 2017.

as if Sleepy said Tesla will be the world's largest in 2017, which he did not. Obviously, Tesla is unlikely to sell millions of Gen3s in the year the car is launched.

If that is your thought process, I have to be skeptical of your conclusions.

 

[TSLAopt]

I am long Tesla. TSLA is nearly 100% of my portfolio and I believe they have a shot at being the world's largest automaker. From where I sit, tftf was merely pointing out that this outcome is not a certainty. And guess what, it's not. A lot can happen between now and 2018, much as I believe in Tesla and believe they can keep up the jaw-dropping execution.

I don't think it's constructive to jump down the throat of anyone who has a differing take on Tesla's prospects. I, for one, would prefer a forum where we could exchange differing opinions civilly.

DHA,
dont kid yourself, not everyone on here is as honest and innocent as you might hope. It's ok in my book to take some jabs at these trolls from time to time, though some argue that it encourages them more (hence the saying "don't feed the trolls").

 

[PeterJA]

Damodaran, a noted expert on company valuation, arrived at a valuation of $68 billion using his assumptions

Julian Cox wrote a brief critique of Professor Damodaran's assumptions, and has promised a more detailed critique. You can find the former here:
Short-Term TSLA Price Movements - Page 1033

 

[sleepyhead]

DHA,
dont kid yourself, not everyone on here is as honest and innocent as you might hope. It's ok in my book to take some jabs at these trolls from time to time, though some argue that it encourages them more (hence the saying "don't feed the trolls").

Exactly.

He says that TSLA is worth $6b-$8b according to his calculations. TSLA will have ~$5b in sales in next year. There is not one logical investor in the world that thinks TSLA deserves a 1.5x forward price/sales ratio; for a $billion company growing sales by 100% year over year over year over year. 15x forward price/sales ratio (and a $75b market cap) would be a lot more logical than 1.5x. Not saying that it deserves 15x, but I could understand someone trying to make that argument. 1.5x is just trolling.

And for all those non-believers out there, in the absolute worst case (excluding any force majeure events) Tesla will have $3.5b. There is no way you can justify a 2x price/sales ratio. You have to be a troll to write this.


BTW, DCF's are garbage: extremely sensitive to inputs. And nobody has the right inputs, not even Elon himself.

 

[Jack6591]

My father instilled in me the belief that I could accomplish anything I set my mind to. The high mileage of life has tempered my passion and beliefs. The last several years, I worked as a solar power inspector for the City of Los Angeles. I made it a point to ask each of customers why they had invested in solar. One very elderly lady made a tremendous impression on me. She emphatically stated: "I am changing the world." Elon Musk, is by stated goal "changing the world."

I thinks this begs the question. Can we change the world? Can an individual, through his actions, change the world? At nigh on sixty years of age, I have grown to realize what you do matters. Your actions ripple throughout the world. Elon Musk, and the Tesla community (we) are changing the world. Changing the world is a passionate, angst-filled, acrimonious business.

In my quiet reflections, I am astonished at the level of civility. Especially, considering the fortunes that have changed hands, and those that will.

 

[sp4rk]

Very well written Jack.
Are we related? My Dad told me the same thing!

Each and every Roadster and Model S owner out here is autonomously changing the world. Elon is our catalyst.

The world needs more catalysts.

Whenever I listen to John Lennon's song, Imagine, I want to add to the lyrics, ...

Imagine no oil
I wonder if you can
No gas stations, refineries or pollution
A brotherhood of man
Imagine all the people
sharing solar / wind energy...

The beauty of this is that our goals are realistic, obtainable and inevitable.

The rest of his song, while admirable ... utopia.

 

[JRP3]

the car market is very different than, say the IT market where a disruptor such as GOOG or AAPL can disrupt the market in just 3-5 years with a new search engine or mobile phone.

And yet Tesla is already disrupting the industry by building a car that is so universally well received that OEM's such as GM are admittedly studying what Tesla is doing. The ultimate time frame may be longer but the potential for disruption is no less.

 

[Convert2013]

Just returned from a party in OC where I was talking to a friend of a friend of mine who owns a company that turbo-charges engines for the auto majors in LA. Naturally Tesla came into the conversation. He thinks electrics are the future and his time in the business is limited.
It is hard to be fully convinced yet if Tesla will become the largest automaker 15 years from now but they have all the ingredients for a good shot at it if they want to be. They more likely will grab a 2% to 5% market share ($ 90 to $100 billion annual revenue by then for Tesla), which can still make them a very large market cap company if they are still growing.. $200 Billion + market cap, IMO.

 

[Jace_91]

Tesla is definitely at a defining point these next few years. I am long TSLA so I am hoping they are the apple of the auto industry. They don't need to sell the most products as long as they can maintain a high end product that people are willing to pay a premium for. Apple seems to be doing okay even after losing market share. Yes there stock is down from its all time high, but that high was unreasonable and had no basis. All us long investors should hope Tesla is the next apple, they're up about 6000% over the past decade, hopefully TSLA will do the same for us and well be driving "free" teslas for years to come.

 

[DonPedro]

If the point of this thread is to refine our thinking about the right valuation of Tesla, then reasoned arguments from both sides should be welcome. I think cautious/skeptical viewpoints are too often dismissed out of hand, with some hostility in the tone of the responses. This turns this thread into mutually reinforcing backslapping for everyone who has "seen the light". This is a pity, because this forum used to be a great source of insight into the stock.

I firmly believe that Elon is changing the world. Even accepting that premise, I am uncertain about what stock price for Tesla is supported today. The following are uncertainties that must be taken into account:
* The probability of success (it is not 100% - business success is always a combination of skill and luck)
* The role of Tesla in that changed world (some companies have changed the world without retaining a lucrative market share)
* The strength of the IP, and the possibility that alternative technological platforms could leapfrog it in the EV market
* Production and supply chain ramp-up - how long to go from 25k/year to 100k and 1m per year? This is hugely underestimated on this forum I think.
* Competitive response (yes, it is pathetic now, but the investor graveyard is full of people who believed that competition would not wisen up)
* Political risks (backlash against EV incentives too early)
* Dillution
* Freak risks (something happens to Elon, factory fire, safety issue with tech, etc. etc.)

On top of all this, I have no idea what a realistic success scenario looks like - 400k or 4 million cars in 10 years? What is ASP? What are the margins? And I need to keep in mind that a decent 10% rate of return over those 10 years means that today's share price should be only ~40% of what it will be then.

Taking all this together, I am very uncertain whether Tesla's great prospects are worth $10bn, $25bn or $100bn or more.

The higher the stock price rises, the higher is the probability that we have passed the right level. (Please do not argue with this, because it is an obvious truth of investing.) The real goal of this thread should be to come up with estimates of what each share is worth. This is a territory that I have not seen any of the bulls (Sleepyhead and so forth) venture into. The reason is of course that it is extremely hard and any numbers you put in will be very uncertain. However, the right response to that uncertainty is not to dismiss DCF models, but to run them again and again with different assumptions to understand the dynamics of the valuation based on the key assumptions. I get really worried when price/sales ratios come up, because that is a valuation metric that has been misused grossly in the past.

 

[marvinat0rz]

Great points, DonPedro.

 

[Jack6591]

While I agree that the voice of reason ought to be a central part of this community. We also take a narrow view of Teslas' products and future. In one sense, the name Tesla Motors should be changed to simply Tesla. As an energy storage company Tesla is capable of disrupting far more than the automotive and petroleum industries.

I see the electric utility industry as the proverbial dinosaur. Distributed generation will very quickly become distributed entrepenuership. The largest solar companies in America are Walmart, and Costco. Both companies state that their investments in solar power provide them with a competive edge. Interestingly, as firms invest in renewable energy and green technologies their stock values increase.

LED lighting, electrical energy efficiency products, renewable energy, and energy storage will enable businesses and individuals to control their own energy futures. The transformation to a "Solar Electric Economy" will provide Tesla with phenomenal product growth. We have only scratched the surface.

 

[AlMc]

Don Pedro, I agree. Civil debate of information, and the way we each look at that information, is a good thing. While I am bullish on TM and feel that it is still an excellent investment I know that much of the valuation is based on continuing to deliver products flawlessly. TM has done this so far and I believe it will continue to execute the stated long term plan very well.

While I have been part of this and the TM forum for only sevral months, I find myself spending more time here versus the TM forum because of the almost maniacal 'troll hunting' that goes on at that forum.

Just as we have all argued for open dissemination of information about production rates, etc., we should also welcome opinions that differ from our own as part of that open dissemination of information.

 

[JRP3]

I don't think any of us have an issue with well reasoned counter arguments. However they have been few and far between.