Seeking advice - Long term hold or pay off debt?

[rolosrevenge]

I think TSLA is overvalued right now. This coming from a guy who wrote an article about TSLA being a 10x opportunity when it was in the low $20s and then about the potential short squeeze (a second article written in the fall of 2011). I have cashed out almost $200k since April from TSLA calls. I will try to sell the remaining ones by next Tuesday.

This stock went too far too fast. Volatility is not over. If / when it will start going down, it will go even faster and much lower than most imagine. If you sell now at least a nice % of your stock / calls, there will be numerous occasions to buy back lower - the worst case you only profit less if TSLA is the only stock in history to go in only one direction. But if you keep them all while holding debt, you will be in a world of hurt with nobody else to blame than yourself and your greed.

Since I sold my position, I really hope you're right :tongue:

 

[DaveT]

I think TSLA is overvalued right now. This coming from a guy who wrote an article about TSLA being a 10x opportunity when it was in the low $20s and then about the potential short squeeze (a second article written in the fall of 2011). I have cashed out almost $200k since April from TSLA calls. I will try to sell the remaining ones by next Tuesday.

This stock went too far too fast. Volatility is not over. If / when it will start going down, it will go even faster and much lower than most imagine. If you sell now at least a nice % of your stock / calls, there will be numerous occasions to buy back lower - the worst case you only profit less if TSLA is the only stock in history to go in only one direction. But if you keep them all while holding debt, you will be in a world of hurt with nobody else to blame than yourself and your greed.

Google IPO'd at $27 billion market cap. I remember people saying that it was overvalued and would tank.

I personally like to think of TSLA's recent secondary offering of $92 as their "official" IPO (at least to me) because it is the place where they probably should have IPO'ed... with a good product and increasing revenue. If you think of $92 as TSLA's IPO, then you can think of the people who got in before that as getting in "pre-IPO". With that perspective, $120 isn't bad.

Also, TSLA's market cap of $15b is still lower than Google's market cap of $27b when they IPO'ed.

Here's the first year of Google after their IPO. It wouldn't have been wise to sell GOOG at $100, especially if you had intimate knowledge of the company and their competitive advantage in the space.

 

[Nicu.Mihalache]

DaveT, can you spot a 3-month period where Google did a 3.5x?
Outside your carefully chosen period, GOOG went from $630 to $475 to $618 to $491 in the space of 7 months in 2001. From $602 to $436 in 6 months in 2010 etc. etc.

Tesla has a sound long term business. It has a chance of tripling its business every 2-3 years for maybe a decade. Not every 3 months. And the market can be not only irrational sometimes, but very short-term oriented. Time will tell. But Tesla the company did not improve even by 1.5x in the space the stock did a 3.5x. It may continue even to $150 in the short term, who knows. But I believe we will see levels below $70 by the end of the year (or later, who knows - if I knew when things will happen, I would have made lots more on the short squeeze; actually I had about 20x more calls in January 2013 than I had in April).

I was simply urging those who ignore debt now when everything looks rosy to contemplate and compare the two outcomes.

 

[DaveT]

DaveT, can you spot a 3-month period where Google did a 3.5x?
Outside your carefully chosen period, GOOG went from $630 to $475 to $618 to $491 in the space of 7 months in 2001. From $602 to $436 in 6 months in 2010 etc. etc.

Tesla has a sound long term business. It has a chance of tripling its business every 2-3 years for maybe a decade. Not every 3 months. And the market can be not only irrational sometimes, but very short-term oriented. Time will tell. But Tesla the company did not improve even by 1.5x in the space the stock did a 3.5x. It may continue even to $150 in the short term, who knows. But I believe we will see levels below $70 by the end of the year (or later, who knows - if I knew when things will happen, I would have made lots more on the short squeeze; actually I had about 40x more calls in January 2013 than I had in April).

I was simply urging those who ignore debt now when everything looks rosy to contemplate and compare the two outcomes.

Hi Nicu, here's my perspective for what it's worth.

When TSLA was $30 in late 2012, I think the company was grossly undervalued. They had won the Motor Trend Car of the Year. The Model S was awesome. No way TSLA should have still been $30. I think the reason it was $30 was because of all the missed guidance during 2012 (they drastically missed all revenue, profit, unit goals for 2012) and people were doubting if Tesla could stay alive and for how many years.

I think if Tesla hit their 2012 numbers we would have seen a stock price of $80-90 at the end of 2012. In other words, people who got in at $30 in late 2012 purchased TSLA shares at a ridiculously low price that had been beaten down by naysayers.

IMO, the reason why TSLA's stock price has increased 4x in the past 3 months is not an indication that is is currently overvalued, but more of an indication of how undervalued it was at $30/share.

No way we're seeing $70 ever again, let alone $100. The mood around TSLA has changed and believers are choosing to hold their shares and not sell. TSLA only has 77m shares float and most of that is eaten up by institutions and long-term believers. Traders will trade an ever shrinking pool of stock shares over time. This creates a tremendous upward pressure on the stock. I don't see another stock on the exchange that has as loyal of believers as TSLA. We're still in the early stages and I think the big mistake some people will/are making is that they're out of the stock right now because they're comparing the current price with the $36 price a few months ago and concluding (wrongly IMO) that the stock is overvalued. Rather, a more fair comparison is to compare the current stock price to the $80-90/share price TSLA should have been at the end of 2012 if TSLA would have met guidance and the price not beaten down by naysayers and shorts.

 

[sub]

I don't think the OP implied he was looking to get out sometime in the near future? I have no idea what TSLA may do short term, I'm new to this, but I'm willing to risk losing what money I have invested because I feel very confident in the long term. If the stock had some wild fluctuations on the way up as you point out google also had, does it really matter if you have no intention of selling? What is google at now? $900+?

 

[Coach1452]

All the "free advice" here is great especially for the one who offered it. We all have different levels of tolerance for debt stress and investment horizons. If you get away from, either/or, thinking consider dollar cost averaging as a way of selling shares to reduce debt over a period of time. Trying to time the market and sell or buy at exactly the right time requires more luck then knowledge about the market and the company you are investing in. By averaging your way into and then out of investments you will more likely do better over time.

If you have the cash flow to support this you could do all of the following:
- Keep making your usual payment. This way you are keeping your cash flow in line with your lifestyle and vice versa.
- Sell a block of shares and make a significant balloon payment to reduce the principle. Now the monthly payment takes a bigger bite out of principle. Remember that there will likely be taxes to pay on this.
- Each month sell a portion of your shares to reduce the loans.

I do believe in using debt to leverage investment opportunities but debt for non-investment vehicles is best paid off as soon as possible.

For what it is worth.

 

[sleepyhead]

I have to agree with everything DaveT said in this thread. Based on what I believe will happen with Tesla in the near future, the stock will be at $500 within the next 3-6 years. $120 sounds like a bargain today, and there is no way the stock will ever go down to $70 without some very (unlikely) horrible news. If Tesla reaches all of its targets by 2017, the stock will for sure be worth at least $500. How it gets there I don't know, but if it goes down to $70 by the end of the year then you have a 10 bagger on your hands in just 3 years time - not going to happen.

 

[ItsNotAboutTheMoney]

(Not an investor, I'm very risk averse. Annoying since I also could have stuck in small amount as disposable income which I don't spend much. I tend to write off my spending money on household purchases to protect our theoreticak net worth.)

To me Tesla is an all-or-nothing judgment call. If you're long, you're very long. So the question is really just how much you can afford to lose. I'd cash in most of my chips and play lower stakes, then add to the value of my winnings by paying off any higher interest debt. (Beware the tax implications, though.) You can decide on how much risk to take by size of retained Tesla stake, student loan balance, savings, other investment.

I'll add this, though: when you have no debt, you are less constrained in your choice of jobs.

PS if you sell and kick yourself later, the bright side is that you'll probably own a 200 mile BEV with a Tesla drivetrain and live in a much better world (Earth, Mars, wherever.)

 

[benfranklin]

Without knowing more, I'd pay off the debt or at least most of it. If you want to be sentimental about it and still hold a position, you could just take all your profits over the next while (look in your tax situation, it might pay to do it over a period of years) and retain your entry cost. Compounding returns are great but compounding debts are not.

I can see the stock dropping into the 90s again. Maybe worse with an incident (Musk's health, major recall, etc.).

I'd definitely avoid trading on margin if you're already in debt. I think TSLA should do well long term because the business is great but the future is always very unpredictable. Not everything is in their control.

If you really believe in TSLA long term you could also pay off your debt and then pick up a few shares a month (what would ordinarily go to loan payments). If Tesla succeeds this is going to be a growth story for years and there is a little while yet before Gen III gets priced in.

 

[DaveT]

I have to agree with everything DaveT said in this thread. Based on what I believe will happen with Tesla in the near future, the stock will be at $500 within the next 3-6 years. $120 sounds like a bargain today, and there is no way the stock will ever go down to $70 without some very (unlikely) horrible news. If Tesla reaches all of its targets by 2017, the stock will for sure be worth at least $500. How it gets there I don't know, but if it goes down to $70 by the end of the year then you have a 10 bagger on your hands in just 3 years time - not going to happen.

I completely agree with sleepyhead's projections. $500 within next 3-6 years.

Here's a brief summary of some numbers for 2018 (or 2019) assuming Gen III is a success and Tesla sells 500k cars/yr (90k Model S/X, 410k Gen III):
17.6 billion revenue from 410k Gen III cars at average price of $43,000 ($35k base plus options. Also need to weigh in performance models).
7.4 billion revenue from 90k Model S/X cars at average price of $82,000 (inc. options and performance models).

So, $25 billion in total revenue for 2018 (or 2019).

Let's say they have 16% gross margin and 8% net profit ($2 billion).

Since Gen III is still in its early stages, Tesla is still in high-growth stage. Let's give them a 50x P/E.

So, valuation is $100 billion (or stock price of $769 based off of projected 130m common shares).

The reason why people will pay a 50 P/E is because in another 5 years (2023-2024), Tesla will likely sell 3x the amount of Gen III vehicles with new factories in Europe and China.

1.5 million Gen III cars at average $40k per car = $60 billion
200k Model S/X at $75k per car = $15 billion
(Note, I'm not including future roadster, truck, etc which will add more revenue)

So, total $75 billion in revenue.

If they have 16% gross margin and 8% net profit, then $6b in net profit.

Let's give them a 25 P/E since the electric car market is still growing strong at that point (by 2028 Elon Musk is forecasting over half of all new cars sold will be electric).

So, that's a $150b market cap ($1154 stock price based off of 130m common shares) in 2023.

These actually might turn out to be conservative numbers.

 

[tlo]

Most people replying here have a lot more assets and are quite a bit older than the OP, so I'm not surprised that the replies are on the conservative side.

But if you are young, low on capital, and think TSLA is going to give you a 100+% return, you have to keep the stock. I think it's that simple. Do your research, come up with an investment thesis, and look at your best and worst case scenarios. Whatever interest rate you're paying, it's likely your bullish TSLA projections are going to indicate a profit. As long as you can survive in the worst case scenario, which probably means you have to carry the loan without any help from your TSLA shares, you have to take the risk-reward.

If it tanks, you have just gained valuable investment experience. And you can still say no regrets because you took a chance on a revolutionary company and it was the right choice based on what you knew at the time.

 

[rolosrevenge]

I completely agree with sleepyhead's projections. $500 within next 3-6 years.

Here's a brief summary of some numbers for 2018 (or 2019) assuming Gen III is a success and Tesla sells 500k cars/yr (90k Model S/X, 410k Gen III):
17.6 billion revenue from 410k Gen III cars at average price of $43,000 ($35k base plus options. Also need to weigh in performance models).
7.4 billion revenue from 90k Model S/X cars at average price of $82,000 (inc. options and performance models).

So, $25 billion in total revenue for 2018 (or 2019).

Let's say they have 16% gross margin and 8% net profit ($2 billion).

Since Gen III is still in its early stages, Tesla is still in high-growth stage. Let's give them a 50x P/E.

So, valuation is $100 billion (or stock price of $769 based off of projected 130m common shares).

The reason why people will pay a 50 P/E is because in another 5 years (2023-2024), Tesla will likely sell 3x the amount of Gen III vehicles with new factories in Europe and China.

1.5 million Gen III cars at average $40k per car = $60 billion
200k Model S/X at $75k per car = $15 billion
(Note, I'm not including future roadster, truck, etc which will add more revenue)

So, total $75 billion in revenue.

If they have 16% gross margin and 8% net profit, then $6b in net profit.

Let's give them a 25 P/E since the electric car market is still growing strong at that point (by 2028 Elon Musk is forecasting over half of all new cars sold will be electric).

So, that's a $150b market cap ($1154 stock price based off of 130m common shares) in 2023.

These actually might turn out to be conservative numbers.

I agree with all of this, but I doubt that they'll pull it off without a single hiccup, that could send the price back into the 80s-90s. If I've learned one thing about them is that they always miss their deadlines. Let's see how all of these new entrants treat a delay or a missed guidance.

 

[sleepyhead]

I agree with all of this, but I doubt that they'll pull it off without a single hiccup, that could send the price back into the 80s-90s. If I've learned one thing about them is that they always miss their deadlines. Let's see how all of these new entrants treat a delay or a missed guidance.

Or they can have a really good quarter, raise guidance for the rest of the year and the stock goes to $180. Then they have their "hiccup" which leads to a sharp pullback to $140. You never know when that hiccup will happen and you can't time these things. If you believe that the stock will be above $1000 within 10 years, you might as well get in today at $120.

- - - Updated - - -

Most people replying here have a lot more assets and are quite a bit older than the OP, so I'm not surprised that the replies are on the conservative side.

But if you are young, low on capital, and think TSLA is going to give you a 100+% return, you have to keep the stock. I think it's that simple. Do your research, come up with an investment thesis, and look at your best and worst case scenarios. Whatever interest rate you're paying, it's likely your bullish TSLA projections are going to indicate a profit. As long as you can survive in the worst case scenario, which probably means you have to carry the loan without any help from your TSLA shares, you have to take the risk-reward.

If it tanks, you have just gained valuable investment experience. And you can still say no regrets because you took a chance on a revolutionary company and it was the right choice based on what you knew at the time.

Completely agree with this and I wrote something very similar a few pages back.

Cash is king. Better to have $50k invested in TSLA and $50k in low interest student loan debt than it is to pay off the loans and have $0.

 

[DaveT]

I agree with all of this, but I doubt that they'll pull it off without a single hiccup, that could send the price back into the 80s-90s. If I've learned one thing about them is that they always miss their deadlines. Let's see how all of these new entrants treat a delay or a missed guidance.

It's true none of us knows when a major hiccup will happen. But there's a lot of momentum in Tesla's favor right now. Production really is just scaling and demand is tremendous. But most importantly, they are going to reach 25% gross margin soon (by end of year). That's going to be huge because there are still a lot of naysayers and 25% gross margin will silence many of their doubts.

The market can act in very, very forward ways. So, I wouldn't be surprised if TSLA's price soon reflects a confidence that they will reach 25% gross margin. Right now, I personally don't think it's built into the price. Thus, I see a lot of upward pressure for the stock. By the time Tesla announces 25% gross margin, I would imagine the stock to be at least $200. If it's not $200 before then, then the 25% gross margin announcement will likely push it over $200.

With that much current upward momentum, I think Tesla stock price can absorb minor hiccups in the near-term.

The other factor is after it reaches $200, it can fairly quickly reach $300+... much sooner than what many people think possible. That's how the markets can work (ie., GOOG went from $100 to $300 in first year of IPO, and they IPO'ed at a hefty $27 billion market cap. People who thought GOOG was overvalued at $100 were incredulous when GOOG went to $300.).

To me the big risk isn't right now for TSLA. The risk lies further down the road when let's say the market has pushed the stock price to let's say $300-400 in a couple years and then we have a recession. That could cause a major 30-40% correction. Also, if anything happens that significantly lowers demand for the Model S, that could cause huge downward pressure on the stock price. However, in the near-term (next year or so) I don't see the economy sinking into a recession and I don't see Model S demand disappointing.

Overall, contrary to some who think it's a very risky time to invest in TSLA, I actually think the risk is quite low. In the bigger picture, we're still in the early stages regarding one of the greatest companies out there playing in a huge, huge market (the global auto market). If you get in now (or if you're already in like the OP), then you can ride the inevitable volatility and upward momentum/growth with a decent margin of safety.

Now, if TSLA was already at $250 then that would be a different story because your margin of safety in the near-term is much lower than if you got in at $120.

Overall, when Tesla announces 25% gross margin they will be a much, much stronger company because of it. I think the stock price will reflect it as well and many people will be wishing they got in under $120 (or under $100, Short-Term TSLA Price Movements - Page 295).

Update: This recent post explains some of what I was trying to communicate, Jim Cramer from Mad Money says we are a cult - Page 2 . Basically, TSLA is a really unique investment opportunity... Truly disruptive product, strong competitive advantage, and huge addressable market.