NYU professor on TSLA valuation

[Causalien]

Well, he believes that what TSLA will be able to do is a bit in the fantasy land. Mainly a car company with the valuation of tech company. However, he understand that TSLA is a momentum stock right now and have been wrong enough times to know so. So he is not disputing that. So overall, he is pretty neutral except for a few belief in him that he think is impossible for TSLA to achieve. Personally, I think his valuation method will come true and only come true IF we are in a downward market like the one in 2008, 2000, 1980 or any of the several different ones that comes every 7 to 10 years. I still hold my previous judgement. The only time he has ever been right was AAPL. I don't know why the street people will hold him in high regards like someone mentioned. The street is filled with one hit wonder prophets. Not a personal attack on him, because he doesn't look like the show off type, but until I see a 2nd correct prediction with a time stamp, he only have 50% accuracy, which is the worst type of prophet out there. I'd rather take Cramer who got about a 56% rate at being wrong than a 50/50.

 

[Norbert]

Well, he believes that what TSLA will be able to do is a bit in the fantasy land. Mainly a car company with the valuation of tech company. However, he understand that TSLA is a momentum stock right now and have been wrong enough times to know so. So he is not disputing that. So overall, he is pretty neutral except for a few belief in him that he think is impossible for TSLA to achieve. Personally, I think his valuation method will come true and only come true IF we are in a downward market like the one in 2008, 2000, 1980 or any of the several different ones that comes every 7 to 10 years. I still hold my previous judgement. The only time he has ever been right was AAPL. I don't know why the street people will hold him in high regards like someone mentioned. The street is filled with one hit wonder prophets. Not a personal attack on him, because he doesn't look like the show off type, but until I see a 2nd correct prediction with a time stamp, he only have 50% accuracy, which is the worst type of prophet out there. I'd rather take Cramer who got about a 56% rate at being wrong than a 50/50.

Yes, he says Audi revenue with tech-ccompany margins would result in a "buy Tesla". And he tries to be fair to some degree.

However, he also allows it to sound as if even Audi revenue with Porsche's margins would result in a company that's worth not even half as much. Yet Audi even with its own margins is already worth much more.

It seems you'd agree with my interpretation, even as you also mention other points in the overall picture.

 

[Causalien]

On the question of whether or not he's out there with an agenda to kill TSLA. No. So let's shelve the pitchforks of our TSLA evangelist army.

 

[Norbert]

On the question of whether or not he's out there with an agenda to kill TSLA. No. So let's shelve the pitchforks of our TSLA evangelist army.

I didn't and don't suggest he is out to kill. I suggested his numbers are wrong.

Someone else suggested he must have been using appreciation of future value etc. To that I responded that's not expressed in the interview. When I say he "allowed" it to sound wrong, then that still very much includes the possibility that he didn't get his numbers straight, or that he wasn't quite aware of how he would be understood on TV.

 

[Convert2013]

Yes, he says Audi revenue with tech-ccompany margins would result in a "buy Tesla". And he tries to be fair to some degree.

However, he also allows it to sound as if even Audi revenue with Porsche's margins would result in a company that's worth not even half as much. Yet Audi even with its own margins is already worth much more.

It seems you'd agree with my interpretation, even as you also mention other points in the overall picture.

Hi Norbert, I agree with your perspective and it has been mine as well mostly. Mine is BMW's revenue's with Porsche's margins. Either way we are looking at more $35 billion + in market cap. If the street is nervous, I buy more shares
Cheers

 

[Causalien]

So... let's discuss. What will make TSLA into a tech company and not a car company? I would like to see TSLA license their 17" screen technology paired up with either verizon or ATT. TSLA transforms itself into making everything high tech for a car, while leaving the rest of the big 4 their coveted role in manufacturing. Something like a TSLA, but on GM, or TSLA on Ford network. This reminded me of bill gates's old exchange with GM CEO that if silicon valley/microsoft were to design cars, the improvement would be a lot faster (Or something to that effect). To which the GM ceo replied. If MSFT were to design cars, it'll crash 10 times every day.

 

[Norbert]

So... let's discuss. What will make TSLA into a tech company and not a car company?

Torque/$.

If Model X and Model E will be as good as Model S, relatively speaking, ...

Best crash test rating, best Consumer Reports rating, best MotorTrend rating, ...

Where else can they go?

 

[serkol]

@Causalien
I know that you are right. But for some reason I was unlucky - almost all my university teachers were of the kind "those who cannot do, teach".

There were a couple of teachers that were brilliant pros in their fields, but they had to teach us basic things, which was very boring for them. For example, our math professor. He was a good mathematician, working on some incomprehensible geometry theories, but he was teaching us just to earn money, and in fact he was a bad teacher. A couple of those that "could not do, so they taught" were in fact not bad teachers, because teaching basic stuff was fun for them, and something that they could handle, when working on the cutting edge in their field was obviously something too stressful and too demanding for them, and just above their abilities.

In my opinion, stock trading, or investing, whatever it's called, is a funny thing, because it's more gambling than science. So the mere fact that there are professors in this field somehow is humorous to me... a professor that teaches how to get rich by trading stocks, but who cannot make a fortune for himself by trading stocks, that's kind of makes me smile... It's not like he is a professor in mining oil - he does not have to drill earth to prove that he's competent in this. Lot's of people trade stocks/invest in their spare time, and some of them make a fortune doing this, then they quit their day job.

 

[Convert2013]

I know that you are right. But for some reason I was unlucky - almost all my university teachers were of the kind "those who cannot do, teach".

There were a couple of teachers that were brilliant pros in their fields, but they had to teach us basic things, which was very boring for them. For example, our math professor. He was a good mathematician, working on some incomprehensible geometry theories, but he was teaching us just to earn money, and in fact he was a bad teacher. A couple of those that "could not do, so they taught" were in fact not bad teachers, because teaching basic stuff was fun for them, and something that they could handle, when working on the cutting edge in their field was obviously something too stressful and too demanding for them, and just above their abilities.

In my opinion, stock trading, or investing, whatever it's called, is a funny thing, because it's more gambling than science. So the mere fact that there are professors in this field somehow is humorous to me... a professor that teaches how to get rich by trading stocks, but who cannot make a fortune for himself by trading stocks, that's kind of makes me smile... It's not like he is a professor in mining oil - he does not have to drill earth to prove that he's competent in this. Lot's of people trade stocks/invest in their spare time, and some of them make a fortune doing this, then they quit their day job.

How do you know the professor hasn't made a fortune for himself? He may still have his day job because he likes what he does...

 

[serkol]

How do you know the professor hasn't made a fortune for himself? He may still have his day job because he likes what he does...

Maybe you are right, what do I know... Maybe he likes teaching how to make money by trading more than making money by trading... This is probably true for all full-time teachers - they probably like teaching more than doing the very thing that they teach how to do

 

[Sus]

In this blog post, he says that he bought Apple very early (in 1997) and then sold in 2012 in the $600+ range for a hefty profit: Musings on Markets: Apple: Know when to hold 'em, know when to fold 'em..

 

[DaveT]

In this blog post, he says that he bought Apple very early (in 1997) and then sold in 2012 in the $600+ range for a hefty profit: Musings on Markets: Apple: Know when to hold 'em, know when to fold 'em..

Dang, that's over a 100x gain. AAPL in 1997 was approx $5-6 (split adjusted). So if he got out $600, that's incredible. 100x gain in 15 years. $10k invested would be $1 million. $100k invested would be $10 million.

- - - Updated - - -

He has a blog post from today about AAPL that's an interesting read:
http://aswathdamodaran.blogspot.com/2013/09/love-company-love-product-love-stock.html?m=1

- - - Updated - - -

Dang, that's over a 100x gain. AAPL in 1997 was approx $5-6 (split adjusted). So if he got out $600, that's incredible. 100x gain in 15 years. $10k invested would be $1 million. $100k invested would be $10 million.

Here's another fun read:
http://www.kyleconroy.com/2010/04/apple-stock

 

[Mnlevin]

Hi Mnlevin,
I appreciate your feedback as you are an owner and so I value it vs. feedback from people who study the stock and are not an owner.
what do you think your gut is basing the 58-75 target price on if you had to guess?
What do you do within the financial services industry if you don't mind me asking?
Thanks

My background is 24 years in finance and insurance industry. For the last 18 years I have held a Certified Financial Planners License (CFP) Chartered Life Underwriters (CLU) professional designation, and recently (2010) became an Accredited Investment Fiduciary. (AIF). Our firm manages retirement plans, evaluating and benchmarking investments as to their suitability for inclusion in the fund lineup. We evaluate each investment from 11 different benchmarking points. None of that means anything here. My guess about the stock price is again a guess. I believe the company will succeed and grow, and by 2015-16 may be producing and selling well over 100-150k cars per year. Maybe even up over 200k. The plant capacity is definitely there and the worldwide demand should continue to grow. However, we all know that the company really hasn't made a profit making and selling the cars YET. Most of the profit, maybe even all, it derived from tax credits, which could go away. There is a extremely heavy demand on capital to build out the SC system and increase capacity maybe even build another plant, and purchasing parts for car orders. People who currently own the stock will eventually start selling, because if they are not receiving dividends they will want to take their LTCG and move on to something else, especially once the peek has been reached. It is just evolution, like the housing market and the tech bubble eventually the "irrational exuberance" gives way to practicality and the Net Book Value plus Blue Sky just doesn't add up.

 

[Causalien]

Interesting information in his AAPL post. His most successful investment in AAPL was done NOT out of valuation, but compassion (or something emotional). Kind of reminded me why I invested in TSLA at the very beginning. I didn't want to see EV die. I even remember writing a very passionate essay about what investing in TSLA means a vote in how you want the future to be.

 

[SteveG3]

Professor wears no clothes

I read Damodaren's blog posts on Tesla, and I consider it fundamentally flawed. I don't doubt that a PHD hangs on Mr. D's wall, but I think this is a case of "The Professor has no clothes."

There were some indications that Prof D is quite unfamiliar with the company (I believe he described the DOE loan as though it is still outstanding, and he describes the company as still losing money), but I will focus on the glaring flaw... the numbers in his analysis of value based on future profitability.

His scenario assumes Tesla will earn $8 billion in 2023 on a pretax basis. Let's round down after tax to $5 billion. Clearly a pe of 15 would mean a $75 billion valuation in 2023, a p.e. of 20 would mean $100 billion (if Tesla does have this kind of market share trajectory I imagine a pe of 20 in 2023 will actually be too low). His calculated current fair value of $67 corresponds to a market cap today of $8.1 billion.

So, a company that would warrant a $100 billion market cap in 2023 ought to be priced at $8.1 billion?

Putting this another way, the Professor writes in the first blog that his projected earnings for 2023 would make Tesla more profitable than all current automakers except Toyota, Volkswagon and BMW. So even if you're not sure about the $100 billion market cap I extrapolated, we certainly know there are other automakers with market caps over $50 billion today (first one I just checked Ford, $70 billion)... how does he reconcile 2023 Tesla being more profitable than ICE automakers that command 2013 valuations of $70 billion, yet 2013 Tesla only deserving an $8 billion dollar valuation ten years away from better profitability currently from such large market cap ICE corporations?

The professor was asked to reconcile this in the first blog's comments section. He responded that Tesla's shares will become very diluted to raise money for growth.

That was an unreasonable glossing over of reality.

To say shares of a company you've modeled to be worth $70-100 billion in ten years should trade shares at an $8 billion valuation to me implies one of two things, 1) you actually think that scenario is a very low probability scenario... something like 20% likely, with 80% likelihood of a massive fail scenario, or 2) you expect a MASSIVE dilution of shares to raise funds... something like a 4-fold increase in the number of shares outstanding (or some combination of these two).

Mr D. has indicated it is the dilution scenario that fills the void. In a blog post where he was detailed enough to state a current valuation of $67 and exact change, no mention that his forecast assumes something of the scale of a 4-fold dilution in shares. No mention either that Elon Musk has publicly stated after the capital raise this spring that he does not foresee the company needing another raise (fwiw, there will be dilution for employee compensation, but nothing anywhere near 4 fold dilution).

To have written this blog, suggested you are modeling an extremely optimistic scenario of $8 billion in pre-tax income in 2023, but not mention either the anemic probability you are assigning to the scenario or the MASSIVE dilution you assume necessary for the scenario, well, the phrase "imprecise notes, and questions of judgment" somehow comes to my mind.

I'm not saying Damodaren is a "bad person"... I merely thinking that the combination of $67 in stories about his analysis, and the word professor attached to his name has given a fundamentally flawed argument way too much credit.

 

[ModelS8794]

The factors that are most relevant and obviously in contrast to likely future progress are, IMO:

1) pace of Operating Margin improvement, which Aswath has bumping along from an irrelevant -2% from the last 12 months, to 12% in 10 years. The reality is EBIT margins are already (in year 1 of his analysis) equal to where he models that number only reaching in Year 6. (I use lease-adjusted figure here b/c this is a FCFF model and cash EBIT margins are the relevant figure in this type of analysis)

2) Pace of revenue growth - Aswath uses a typical high growth in early years, low growth in later/mature years approach. With Tesla this leads to bad output because revenue will exhibit much less homogeneous growth rates because platform introductions introduce step-changes in revenues from year to year. Additionally, Tesla's revenue growth in year 1 is severely underestimated, because it works off a base that looks to Last 12 months, which includes a 6 month period where production was closer to 0 than current run-rates. NTM revenue is likely to be closer to $2.5 Billion, a 90% growth rate, versus the 70% growth rate in his model. and so on, with the Model X launch in year 3, and the Model E launch in year 6/7.

3) ROIC - In this world of cash flow modeling that we've entered here, ROIC is probably at once the most important and least estimate-able metric in the model. This is IMO the key debate point over which tesla from $160 will live or die. If this turns out to be just another auto manufacturer with huge capital intensive spending needs and low returns on that investment, then that will mean low ROIC, because tesla will have lower margins, higher annual reinvestment needs, and negative free cash flow for many years versus what is needed to justify current prices. On the other hand, if tesla ends up with substantial brand power and well-spent R&D, that will lead to sustainable and high EBIT margins, lower reinvestment needs, positive free cash flow earlier on, and therefore high ROIC and less need for dilution from capital raises.

When I putz around with his model and insert margin and reinvestment rates that are more in line with a brand power and R&D intensive vs. capX intensive firm, the outputs change quite dramatically. I would therefore love to hear more from those inclined to discuss these aspects of Tesla's business model.

 

[Convert2013]

In our capitalist system even a professor wants to make some serious dough. Using his credentials to rationalize a certain scenario to bring the price down for TSLA is ideal for him and his buddies to buy low. After which he can then justify a higher price as Tesla grows and....$$jackpot$$. I read his Apple blog. He made a cr** load of money from $5 to $600 and he is proud (and greedy) from the tone in his article. Same old story of manipulation.

 

[Norbert]

Putting this another way, the Professor writes in the first blog that his projected earnings for 2023 would make Tesla more profitable than all current automakers except Toyota, Volkswagon and BMW. So even if you're not sure about the $100 billion market cap I extrapolated, we certainly know there are other automakers with market caps over $50 billion today (first one I just checked Ford, $70 billion)... how does he reconcile 2023 Tesla being more profitable than ICE automakers that command 2013 valuations of $70 billion, yet 2013 Tesla only deserving an $8 billion dollar valuation ten years away from better profitability currently from such large market cap ICE corporations?

Yes, that not only doesn't appear to make any sense, there is also a huge gap in terms of explanations necessary. As a professor, it is surprising that he doesn't address that.

Meanwhile I read his blog, the follow-up, and opened the spreadsheet to look for explanations.

It's like he isn't aware of the market caps in the auto industry. Maybe by his calculations even Audi would be overvalued by a factor of 5x or whatever.

He is sort of saying: here is my spreadsheet, and that's the number that came out of it, even though I entered 'paradise' as input values. If you don't like the output, just change it as you like.

 

[SteveG3]

yes Norbert. I think the NYU professor attached to his name leads some to dismiss the idea of digging into his numbers to see if they make sense. This doesn't mean he's intending to put flawed analysis past people, but it is having that effect. Very little digging shows vastly unreasonable numbers in plain sight.

 

[Norbert]

When I putz around with his model and insert margin and reinvestment rates that are more in line with a brand power and R&D intensive vs. capX intensive firm, the outputs change quite dramatically. I would therefore love to hear more from those inclined to discuss these aspects of Tesla's business model.

You seem to understand his model well enough to answer this question: What is the market cap which the company he models will have in 10 years? He seems to say $8-$10 billion, but perhaps he thinks that is what the current market cap should be today, and that the future market cap will be much higher. In that case, how high would it be? And isn't it up to investors to decide how much of the future market cap they want to price in?

Whereas if he thinks that $8 - $10 billion is the market cap achievable in 10 years, then why would a company with the revenue of Audi, and the profit margins of Porsche, have a much smaller market cap than Audi itself actually has today?