Doggydogworld
Active Member
Until the subject turns to electronics or software. Fortunately he leans more on other staff members in those areas these days.
-
Want to remove ads? Register an account and login to see fewer ads, and become a Supporting Member to remove almost all ads.
Tesla BEV Competition Developments
- Thread starter uselesslogin
- Start date
-
- Tags
- TSLA
Gauss Guzzler
Safety Score = 42
Munro does not actually "know" what he's talking about - he's just guessing. There's a difference.
I'm a big fan of his channel and have a great respect for the successful business he has built as well as his intimate knowledge of 1980's Pontiac bodywork. But he doesn't actually "know" the product - he's reverse-engineriguessing just like Weber Auto, Engineering Explained, or any other outsider.
Only the people who actually "know" the product actually "know" the product.
There are pros/cons to that of course (they know what to highlight and what to hide) but my point is simply that this is an important distinction that Lucid is excelling in. They've taken the best parts of BMW's excellent technical publications combined with the best parts of Tesla's excellent parties / tweets to produce a higher grade of technical communications than either.
And by doing so, Lucid has discouraged Munro/Weber/etc. from investing an episode into all the perceived shortcomings of their design. No one wants to listen to Sandy complain about the number of bolts in this motor housing, we just want a detailed tour of the innovation and we got it.
I'm a big fan of his channel and have a great respect for the successful business he has built as well as his intimate knowledge of 1980's Pontiac bodywork. But he doesn't actually "know" the product - he's reverse-engineriguessing just like Weber Auto, Engineering Explained, or any other outsider.
Only the people who actually "know" the product actually "know" the product.
There are pros/cons to that of course (they know what to highlight and what to hide) but my point is simply that this is an important distinction that Lucid is excelling in. They've taken the best parts of BMW's excellent technical publications combined with the best parts of Tesla's excellent parties / tweets to produce a higher grade of technical communications than either.
And by doing so, Lucid has discouraged Munro/Weber/etc. from investing an episode into all the perceived shortcomings of their design. No one wants to listen to Sandy complain about the number of bolts in this motor housing, we just want a detailed tour of the innovation and we got it.
Last edited:
I've personally had to reverse engineer things. I have been doing it the last few weeks. The company I work for needs an updated version of some old software. The source code was lost and the last guy to work on the software left about 5 years ago.
Having access to the original material to make the product, whether that be source code for software or other material for physical objects, is way easier than reverse engineering, but reverse engineering is not just guesswork. If done right it's more like doing scientific research.
Though I did say that having the company describe their own product has advantages. That wasn't just a throw away comment.
willow_hiller
Well-Known Member
I wonder if it's a coincidence that VW is making this announcement so close to Tesla's AI Day:
cleantechnica.com
Volkswagen Introduces GEN.TRAVEL, A Self-Driving Innovation Experience Vehicle - CleanTechnica
Volkswagen brought its fully autonomous TaaS GEN. TRAVEL concept car to Paris last week at the Chantilly Art Show.
cleantechnica.com
petit_bateau
Active Member
UK flushing itself down Brexit toilet
www.theguardian.com
Shock therapy: turmoil engulfs Britishvolt’s £3.8bn battery factory
Future of company hailed by Boris Johnson as key to green industrial revolution hangs in the balance, as the first in our Electric dreams series on Britain’s fledgling battery industry reveals
www.theguardian.com
petit_bateau
Active Member
I'm sorry but I did not make a note of who first linked to this on the TMC site so I cannot give correct thanks.
This article is a pretty decent synopsis of what is happening in the Chinese BEV market including the many product launches and the very significant qualitative and quantitative progress of the Chinese manufacturers. Just as informative and sensible are many of the comments below it. The parallels with the growth of other markets is obvious, not only the transitions in China but also earlier ones in Korea and Japan. Worth reading imho.
This article is a pretty decent synopsis of what is happening in the Chinese BEV market including the many product launches and the very significant qualitative and quantitative progress of the Chinese manufacturers. Just as informative and sensible are many of the comments below it. The parallels with the growth of other markets is obvious, not only the transitions in China but also earlier ones in Korea and Japan. Worth reading imho.
BYD has outsold Tesla YTD if you count NEVs (BEVs + PHEVs is my understanding), but even going by BEVs alone...they are ramping quickly and closing in on Tesla. In 3Q22, their BEV sales alone were about 75% of Tesla's.
Doggydogworld
Active Member
Yeah, BYD continues to crush it. 537k EVs in Q3 vs. #2 Tesla at 344k (BTW I think NEV also includes fuel cells, but BYD doesn't sell those anyway). Look for BYD to do 750-800k in Q4. Pretty amazing compared to 594k for the full 12 months last year.
They have narrowed the gap, but I doubt they'll catch Tesla in BEVs alone. I guess BYD will do 360-390k BEVs in Q4 vs. 425-450k for Tesla. That's the closest BYD will get for a while, as sales in China drop in Q1 and BYD doesn't export enough to offset that. I see BYD saturating in China in 2023 -- a 3m annualized rate this quarter would already get close to VAG's all-time high of ~4m/year. Exports will be a slow slog. I don't see them gaining much ground in Europe and they have no consumer presence in the US. They'll do well in places like Australia and South America, but it's hard for those markets to move the needle.
Tesla, meanwhile, is set to get a nice tailwind from the Inflation Augmentation Act. So Tesla at 2m+ BEVs next year should easily outpace BYD at 1.6-1.8m. One thing that could change the equation is if BYD's mix shift back toward BEVs. They were 80% BEVs a couple years ago. I don't know what drove their recent crazy PHEV growth (+307% YTD!!!) or what might cause the mix to shift back toward BEV. But a 60/40 split on something like 4m vehicles next year would be enough to take the BEV crown.
Doggydogworld
Active Member
They sold 230k "oil-fueled vehiicles" in 2019 (plus 72k PHEV, 143k BEV and 10k bus/truck/etc.). They'll do almost 900K++ PHEVs this year. So it's a lot more than just switching ICE over to PHEV.
JRP3
Hyperactive Member
Not exactly "competition" but a city car that actually looks practical. The Microlino, 4 wheels and fully enclosed, looks like fun.
_Redshift_
Member
I was about to post the same video.
Rear drive, unassisted, super tactile fun!
What a cheeky, delightful car! Love it. If I got one, I’d dress it up in light peach color changing vinyl wrap.
Chick magnet, baby.
petit_bateau
Active Member
COMPARISON OF BASE CASE SCENARIO WITH STRONG CHINA COMPETITION SCENARIO - DESCRIPTION & RESULTS
This scenario analysis compares a Base Case scenario with a China Case scenario. In the Base Case Tesla grows at approximately 50% per year to produce 20-million vehicles/yr in 2030 with 30% gross margin sustained throughout. In the “China Case” stronger competition from Chinese automotive sector enters the global market such that Tesla is adversely affected. Therefore Tesla’s pricing power wanes and so gross margins decline to 20% and then volume growth is curtailed to 15-million vehicles/yr in 2030.
The analysis suggests that a rational observer in 2024 would value Tesla at approximately $100/share less if they think the more likely scenario is going down the China-affected pathway,. This $100 difference might then grow in time or stay constant, largely depending on which valuation methodology the observer is adopting.
HISTORY / MOTIVATION RECAP
1. The relevant BEV market is split 1/3 : 1/3 : 1/3 between USA, China, and Europe. (sorry about the little'uns, but I need to simplify)
2. It was only a few years ago that Tesla really had no competition in China, and only a couple of years ago that Tesla opened the Shanghai factory.
3. During the last 2-3 years Tesla has been raising prices by $10k-$15k and in the process has gone from maybe 20% GM to maybe 30% GM.
4. During those few years Tesla BEV competition in China have gone from only being viable in non-Tesla segments to becoming viable and competitve at lower prices in Tesla-segments. So it takes 2-3 years for China to build capacity faster than Tesla does, and to play sufficient catch-up in product terms, for 1/3 of the relevant market.
5. US and European competition really aren't making a difference and so are not directly interesting to this analysis.
PROJECTION
- The Chinese continue to build capacity faster than Tesla and they progressively push harder at exports to Europe and USA. Within 2-years they either fully into Europe (or USA) or halfway into both. Within 4-years they are fully into both (i.e. they can overbuild at the rate of 1/3 in two years). Ignore incentive programs as they will come and go.
6. Competition starts to bite into Tesla margins and so Tesla cuts prices as the excess demand is run off - the GM of 30% declines to 20% over the next 5-years, and that includes income from NoA and FSD in automotive.
7. But Tesla are then able to hold BoM costs stable and to maintain a prestige brand position with GM% then steady at 20%. (so still unusually good)
8. But this also has a numerical effect on Tesla caacity build in the later years, with the max capacity build rate becoming capped at approx. 2m/yr due to competition effects. This would mean Tesla reaches max 15.2m/yr in 2030, not 20m/yr, i.e. this effect starts to cut in as the GM% stabilises, likely due to internal Tesla discipline.
- One point to notice is that I assume the Chinese also in effect practice price discipline. There is however nothing to prevent them continuing to overbuild capacity and wiping out the entire market. But my guess is China would back off, likely holding about 30-40m/yr of the global market in 2030. This would leave 16m/yr for Tesla and 24m-34m/yr for everybody else (assuming constant market of 80m/yr).
- Ignore RoboTaxi completely for this examination.
All other parts of the business are held constant.
***** NOTE ****
Some bits of the China Case model contain cells that are still calculating Base Case stuff. The actual Earnings Per Share flowpath is however correct.
RESULTS SUMMARY
The thing to watch is the delta between the Base Case and the China Case.
==================================================
Base case (PE-driven) = 2024 @ $697, progressing to 2030 @ $1953
China case (PE driven) = 2024 @ $598, progressing to 2030 @ $1322
=================================================
Base case (NPV driven, 10%) = 2024 @ $418 progressing to 2030 @ $589
China case (NPV driven, 10%) = 2024 @ $275 progressing to 2030 @ $398
=================================================
BASE CASE RESULTS – DETAIL
For completeness this includes all the SGA, Energy, etc.
Consequent share price analysis from two different directions. Firstly off of PE (see red border box). Secondly driven by NPV (see green border box). Note that the NPV-model looks forwards 20-years and assumes that all years after 2030 are identical. (This model is using the Excel NPV function). The reason for selecting a 10% discount rate is that this appears to be approximately what the market is imposing given the current share price. Obviously there is divergence between the PE-driven value and the NPV-driven value, how to view that is again a matter of opinion.
CHINA CASE RESULTS - DETAIL
To simplify the years 2024 – 2030 are the ones impacted. This is because in this model the prior years (2022/23) are driven from the quarterly model which is left unchanged. The cells affected are in blue – initially the price power loss reduces GM%. Subsequently growth rate is constrained as some models are not brought to market, etc.
The services, SGA, energy are unaffected.
Share price implication
Whether those differences in share price are enough to make anyone scrutinise the details of future data as it comes to light is a matter of opinion.
*** end ***
This scenario analysis compares a Base Case scenario with a China Case scenario. In the Base Case Tesla grows at approximately 50% per year to produce 20-million vehicles/yr in 2030 with 30% gross margin sustained throughout. In the “China Case” stronger competition from Chinese automotive sector enters the global market such that Tesla is adversely affected. Therefore Tesla’s pricing power wanes and so gross margins decline to 20% and then volume growth is curtailed to 15-million vehicles/yr in 2030.
The analysis suggests that a rational observer in 2024 would value Tesla at approximately $100/share less if they think the more likely scenario is going down the China-affected pathway,. This $100 difference might then grow in time or stay constant, largely depending on which valuation methodology the observer is adopting.
HISTORY / MOTIVATION RECAP
1. The relevant BEV market is split 1/3 : 1/3 : 1/3 between USA, China, and Europe. (sorry about the little'uns, but I need to simplify)
2. It was only a few years ago that Tesla really had no competition in China, and only a couple of years ago that Tesla opened the Shanghai factory.
3. During the last 2-3 years Tesla has been raising prices by $10k-$15k and in the process has gone from maybe 20% GM to maybe 30% GM.
4. During those few years Tesla BEV competition in China have gone from only being viable in non-Tesla segments to becoming viable and competitve at lower prices in Tesla-segments. So it takes 2-3 years for China to build capacity faster than Tesla does, and to play sufficient catch-up in product terms, for 1/3 of the relevant market.
5. US and European competition really aren't making a difference and so are not directly interesting to this analysis.
PROJECTION
- The Chinese continue to build capacity faster than Tesla and they progressively push harder at exports to Europe and USA. Within 2-years they either fully into Europe (or USA) or halfway into both. Within 4-years they are fully into both (i.e. they can overbuild at the rate of 1/3 in two years). Ignore incentive programs as they will come and go.
6. Competition starts to bite into Tesla margins and so Tesla cuts prices as the excess demand is run off - the GM of 30% declines to 20% over the next 5-years, and that includes income from NoA and FSD in automotive.
7. But Tesla are then able to hold BoM costs stable and to maintain a prestige brand position with GM% then steady at 20%. (so still unusually good)
8. But this also has a numerical effect on Tesla caacity build in the later years, with the max capacity build rate becoming capped at approx. 2m/yr due to competition effects. This would mean Tesla reaches max 15.2m/yr in 2030, not 20m/yr, i.e. this effect starts to cut in as the GM% stabilises, likely due to internal Tesla discipline.
- One point to notice is that I assume the Chinese also in effect practice price discipline. There is however nothing to prevent them continuing to overbuild capacity and wiping out the entire market. But my guess is China would back off, likely holding about 30-40m/yr of the global market in 2030. This would leave 16m/yr for Tesla and 24m-34m/yr for everybody else (assuming constant market of 80m/yr).
- Ignore RoboTaxi completely for this examination.
All other parts of the business are held constant.
***** NOTE ****
Some bits of the China Case model contain cells that are still calculating Base Case stuff. The actual Earnings Per Share flowpath is however correct.
RESULTS SUMMARY
The thing to watch is the delta between the Base Case and the China Case.
==================================================
Base case (PE-driven) = 2024 @ $697, progressing to 2030 @ $1953
China case (PE driven) = 2024 @ $598, progressing to 2030 @ $1322
=================================================
Base case (NPV driven, 10%) = 2024 @ $418 progressing to 2030 @ $589
China case (NPV driven, 10%) = 2024 @ $275 progressing to 2030 @ $398
=================================================
BASE CASE RESULTS – DETAIL
For completeness this includes all the SGA, Energy, etc.
Consequent share price analysis from two different directions. Firstly off of PE (see red border box). Secondly driven by NPV (see green border box). Note that the NPV-model looks forwards 20-years and assumes that all years after 2030 are identical. (This model is using the Excel NPV function). The reason for selecting a 10% discount rate is that this appears to be approximately what the market is imposing given the current share price. Obviously there is divergence between the PE-driven value and the NPV-driven value, how to view that is again a matter of opinion.
CHINA CASE RESULTS - DETAIL
To simplify the years 2024 – 2030 are the ones impacted. This is because in this model the prior years (2022/23) are driven from the quarterly model which is left unchanged. The cells affected are in blue – initially the price power loss reduces GM%. Subsequently growth rate is constrained as some models are not brought to market, etc.
The services, SGA, energy are unaffected.
Share price implication
Whether those differences in share price are enough to make anyone scrutinise the details of future data as it comes to light is a matter of opinion.
*** end ***
Last edited:
@petit_bateau The chart above shows a China case of 41.32 net income per share in 2030 and the same column lists a forward and trailing PE of 32 but the share price as per NPV is 398. Trying to understand NPV. Found this article on the hated SA which seems to do a good job:
Net Present Value (NPV): Definition & Formula
Net present value, or NPV, calculates how profitable a project or investment is in today's dollars. Learn how it's calculated.
seekingalpha.com
I admit am still confused as I see the numbers laid out for a $10,000.00 investment earning 10 a year over five years to have an NPV $6,208.00 dollars. How does this make sense?
From the article:
"For the full five year period, calculations would look like this:
Now find the sum of the PVs, like this:
To find the NPV, subtract the initial investment from the sum, like this:
The NPV is $6,208. This means that the value of $10,000 earning 10% annual return for five years is worth $6,208 in today's dollars."
Did the author write this up correctly? That last sentence is a real mind bender. How could the value of 10,000 today be worth less when invested at a 10% return? Is there an opportunity cost as investments returning more than 10% are easy to find (don't think so)?
Sorry for my inability to grasp this. I was trying to find comparables on the internet, for example what is the NPV of MSFT today? Of AAPL? Of the S&P 500? I failed to find this metric anywhere in my quick searches. My limited research seems to indicate that NPV is a vehicle to determine the profitabilities of projects, rather than to be used to calculate SPs.
As per the chart above, TSLA in 2030 with 41 dollars of cash flow per share could decide to issues an annual 30 dollar per share dividend and still be banking 11 dollars per share per year. At the NPV SP of 398 this would equal a 7.5% dividend. Something tells me that SP might go terrifically higher at that point, assuming the ten year is not at 10%.
Thanks for this write up! A lot of work. I appreciate any feedback you could provide.
petit_bateau
Active Member
I'll think about this tomorrow to try and answer you (if I can). Here it is beer o'clock on Saturday evening and my brain can only manage very simple things now.
(I did run a validation by setting the discount rate to 0% and then cross-checking with a simple sum of the EPS row, and indeed they were the same.)
JRP3
Hyperactive Member
Sandy gets a tour of the Vinfast factory. Not too many details but Sandy is impressed with the operation. Interesting detail is they press fit cells into a holding fixture instead of gluing them. Odd note, Sandy wasn't aware of Car wash mode or neutral in Tesla vehicles, thought it was a Vinfast inovation.
petit_bateau
Active Member
Let me try and answer your questions, but if you don't find my answer convincing please feel free to say so, then we can figure out whether I am making an error or whether I am just bad at explaining. Please bear in mind that I am really an engineer and I generally deal with this sort of stuff in the context of project economics. Also, as is usual, the simplest questions are in many ways the most profound and you've asked a zinger.View attachment 861443View attachment 861443
@petit_bateau The chart above shows a China case of 41.32 net income per share in 2030 and the same column lists a forward and trailing PE of 32 but the share price as per NPV is 398. Trying to understand NPV. Found this article on the hated SA which seems to do a good job:
Net Present Value (NPV): Definition & Formula
Net present value, or NPV, calculates how profitable a project or investment is in today's dollars. Learn how it's calculated.
I admit am still confused as I see the numbers laid out for a $10,000.00 investment earning 10 a year over five years to have an NPV $6,208.00 dollars. How does this make sense?
From the article:
"For the full five year period, calculations would look like this:
Now find the sum of the PVs, like this:
To find the NPV, subtract the initial investment from the sum, like this:
The NPV is $6,208. This means that the value of $10,000 earning 10% annual return for five years is worth $6,208 in today's dollars."
Did the author write this up correctly? That last sentence is a real mind bender. How could the value of 10,000 today be worth less when invested at a 10% return? Is there an opportunity cost as investments returning more than 10% are easy to find (don't think so)?
Sorry for my inability to grasp this. I was trying to find comparables on the internet, for example what is the NPV of MSFT today? Of AAPL? Of the S&P 500? I failed to find this metric anywhere in my quick searches. My limited research seems to indicate that NPV is a vehicle to determine the profitabilities of projects, rather than to be used to calculate SPs.
As per the chart above, TSLA in 2030 with 41 dollars of cash flow per share could decide to issues an annual 30 dollar per share dividend and still be banking 11 dollars per share per year. At the NPV SP of 398 this would equal a 7.5% dividend. Something tells me that SP might go terrifically higher at that point, assuming the ten year is not at 10%.
Thanks for this write up! A lot of work. I appreciate any feedback you could provide.
Here is that China Case table:
Firstly in the China Case you are correct that the projection is indeed for an EPS of $41.32 in 2030. Then if you look downwards in my table you will see a red box outline for the PE-version of the share price, and a green box outline for the NPV-version of the shareprice.
Take the red box. Using a PE of 32 in 2030 one simply multiplies $41.32 x 32 = $1322.24. The PEG of 32 is the manual input that drives the output share price of $1322. The EPS=32 is in a tan colour cell as it is a manual input. (You can’t always rely on my colour codes by the way as I do get scatterbrained).
You can also see that this share price of $1322 would result in a trailing PEG of 1.0 which implies perfect valuation (i.e. the valuation at which a shareholder would be indifferent between having one share or $1322 in cash). Personally I think it would be an over-valuation if this scenario were going on as I posses two pieces of knowledge. Firstly I know it is a trailing PE and so it is backwards-looking, this is (or would be in 2030) common knowledge. But I also know what is about to happen next in my spreadsheet which is that 2031 will be exactly the same as 2032. Therefore in this scenario Tesla will stop growing and so this in my opinion would be an over-valuation if this were to come to pass.
This demonstrates the problem faced by a ‘conservative’ investor who insists on only using historical (i.e. trailing) data in arriving at their valuations. When a share is growing they are inevitably undervaluing it, and so can never bring themselves to pay a high enough price to acquire any shares from those who are forwards-looking. Conversely when a share comes off-growth they overvalue it and so pay too much to the forwards looking people who offload and laugh all the way to the bank. So the investor who tries to be very safe actually ends up losing out on the gains on the way up, but then receiving all the losses on the way down. Personally I think ideally investors should be very alert and looking in all directions: forwards, backwards, sideways for bandits, and under rocks for scorpions, and in the sky for hawks.
That is why a few lines further down the spreadsheet also contains a forwards PE and a forwards PEG. The forwards PE is of course still 32 as the EPS in 2031 is the same $41.32 . But if you look closely you will see that the 2029 forwards PEG has gone to 0.9. The 2030 cell is blank because it is #DIV/0! error as growth goes to zero and my spreadsheet tidily does not show that. I guess instead of setting it to go blank I should have put a big warning [!!off-growth!!] output to indicate that a PEG is no longer an appropriate valuation methodology and that investors need to be careful about over-valuations. In my eyes a zero-growth company does not deserve a PE of 32, instead a PE of something in the 7-12 range or even less depending on how safe or risky one feels it may be.
Turning now to the green box. This is the area where the NPV version of the share price is calculated. In the 2030 box it calculates using a NPV formula and a discount rate of 10% a fair price of $398 to go with that $41.32 EPS. This in turn mechanistically yields a PE ratio of 398/41.32 = 9.63 which my spreadsheet rounds to 10. From this you begin to see why people bandy around PE ratios of 7-12 as being appropriate for zero-growth businesses. You can see that the NPV approach is giving an interestingly different view as to the correct valuation, and this is because it looks into the future at the likely stream of EPS coming towards the shareholder each year.
This leads us to your queries about NPV and you give that SeekingAlpha link. Some SA explainers are good and some less so. This one is not great when I read it and I struggle with its way of explain things. Can I please consign it largely to the dustbin. It may be right, but it reads like someone reciting a textbook they themselves did not understand.
Quick Note. In project economics I would look at the project’s cashflow and from that I would understand whether I might get a return on the project investment in the initial year (the zero’th year) or whether I might wait until the first year (1) or perhaps later. With a share it can be tricky to decide which is the first year of return. The excel NPV function actually uses the subsequent year so there is a slight error in my scenario analyses as I forgot that.
With a share we are hoping that all the Net Income per Share (i.e. PROFIT !) will result in a return of value to the shareholder. The simplest way to think of this is that business takes all the profit and distributes it to the shareholders as a dividend at the end of the year, in the case we are looking at this would be the $41.32 Earnings Per Share. A couple of other ways to think of it are possible. One is that the company puts the profit in a bank account and the money accumulates, which the accountants call Retained Earnings and hopefully the bank pays some interest (enough at least to protect from inflation), but again the cash could in the future be distributed to shareholders. A third possibility is that company invests the money wisely in new product development and new factory capacity and that they in turn create additional value in future years. Or the company could do a mixture of all of these – and that is why we mentally ‘count’ all of the EPS as being ultimately potential value to shareholders when doing an NPV analysis.
So I can take the stream of future outputs of $41.32 per share and value them in some way to decide how much to pay to purchase one share. But will Tesla be there for 100-years, or will it go bust in 5-years ? Will you be alive to know ? If you recall the Charlie Brown cartoon you know that Lucy always pulls the football away and it goes wrong. We learn early as children that a sweet in our hand is worth more than the same one that is promised later, because stuff happens. It is the same with money – getting $41.32 today is better than getting the same $41.32 next year as inflation, death, bankruptcy, competition, devaluation, recession all might come along. Depending on how we feel about things we ascribe a percentage factor to our view of how much we should discount the future value to allow for this. In advanced valuations we might put in specific discount factors for individual years, for example if we think that a war will happen in year 3 and 4 that merits a 40% discount factor to account for likely bomb damage to the factory; but that in the other years we are just concerned about less worrying things worth say 8% a year. However in most normal work we use the same discount rate throughout the whole of a project, say 10% or 14% or 3% or whatever.
So with a discount rate of 10% per year in mind if I give you something of value now and you promise to give me a $1.00 dollar cash straight back to me I value that promise as being worth $1.00 to me. But if I give you $1.00 now and you promise to give it back a year later, then I only value that promise as being worth $0.91 in today’s equivalency (i.e. $1.00 x (1/(1.1^1)) = $0.91 where the 1.1 is 100%+10% expressed as a decimal, i.e. 100+Rate%). But the promise of a return two years later is worth another 10% discount, so $1.00 x 1/(1.1^2) = $0.83.
So if I were to give you something of value today, and if your doctor were to privately tell me you are going to drop dead in a few years, then I might value future stream of infinite promises as being worth $1.00 + $0.91 + $0.83 + $0.75 …. etc. So if you wanted cash today with first repayment next year and I figured I’d get three payments before you dropped dead and your stream of infinite promises evaporated into thin air then I’d be prepared to give you no more than $2.49 for that promise. And that is basically how we use NPV to assess a share price if we think that there would be nothing substantial of value left at the end. If we thought there might be a payout in the end then we’d take that into account as well but discount that also.
In a normal world we can then build a valuation table like this, assuming that we receive the first return on our investment in year after we invest (which may not be the case). This is of course the no-growth version, and I will assume that the company goes terminally bankrupt after 5-years with no residual value left. There is also an Excel function for NPV calculations and I have put that number in the lower right to check that we can trust Excel’s workings. So in this case I would be technically “indifferent” to pay $3.79 for a share in this company, or alternatively I would consider the $3.79 to be perfectly priced and assuming that the company doesn’t decline in performance or drop dead a year early. If I paid $3.00 then I might think I was getting a good deal, and if I paid $4.00 I would probably be guilty of overpaying. And as you can see we can trust Excel to do the sum for us provided we use the NPV function correctly.
Now let’s consider what happens to our zero-growth company if we think it will go on forever. Here are a series of tables showing how the duration being valued makes a difference, always from the perspective of the investor in the Zero’th year. The question that will immediately spring to mind is whether it is meaningful to value a commercial business of zero-growth 15 or 20 years into the future. As you can see the zero growth business is getting pretty fully valued after 10 years, and because of discounting the additional value that the investor might be prepared to pay for returns out to 15 years or even 20 years becomes relatively unimportant.
Valuation out to 5 years = $3.79
Valuation out to 10 years = $6.14
Valuation out to 15 years = $7.61
Valuation out to 20 years = $8.51
But what happens if this is a growth company. Let’s do the same exercise again but this time assuming the company grows at 20% per year :
Valuation out to 5 years = $5.45
Valuation out to 10 years = $13.87
Valuation out to 15 years = $26.88
Valuation out to 20 years = $46.99
Now all of a sudden the prospect of long term sustained growth becomes very interesting. But the time horizon of the analyst becomes a major factor in determing what they might consider to be fair value.
And here is the same company growing EPS at 50% per year for 10-years, but then flatlining for the second 10-years. You will recognise this as the underlying Tesla Base Case.
Valuation out to 5 years = $9.29
Valuation out to 10 years = $53.08
Valuation out to 15 years = $109.27
Valuation out to 20 years = $144.15
The final point to consider is that in the examples above I have only viewed the situation from the perspective of an observer contemplating share purchase and standing in the Zero’th year. But in the actual Base Case and China Case scenario analysis I have also considered the situation from the perspective of a share purchaser standing in subsequent years. In the PE-driven calculations that is implicit. In the NPV-driven calculations I simply shunt the zero’th year forwards one year at a time to get an equivalent result. This in turn implies looking 20+ years forward from a standpoint that is already 10-years in the future, which is very brave 30-year forecasting, but necessary if one is to do a scenario analysis like this.
It may of course be that I have missed something. If so please say so.
My personal opinion is that high growth shares are so sensitive to the underlying assumptions that equally sensible people can come up with equally valid but wildly different valuations depending on which methodology they are using, and what methodological assumptions they are using (time horizon, discount rate) even if they were to be considering the same set of business data (for example agreeing on growth rate). When a business has a market capitalisation as great as Tesla is now ($1-trillion of a global stock market valued at approx. $100-trillion) and one goes on to consider where Tesla might be in 10-years with say a market cap that is 5% of the entire world stock market it is no wonder that valuations vary wildly.
When we add in the possible effects of different business scenarios I personally am pleasantly surprised if the ‘now’ valuation only goes down by approx. $100 share in a more pessimistic scenario (due to potential of stronger than anticipated China competition) with current share price at approx. $220/share. Equally I recall that a week or so ago I sketched out a more optimistic scenario than the base case that resulted in perhaps a doubling in the future size of the business due to the potentially greater return from the robotics sector. Funnily enough people seem not to like to hear downside scenarios ad much prefer upside scenarios.
My other take-away with exercises of this nature is that I respect and listen more attentively to those who do their own parallel modelling, as they are as aware as I am of the pitfalls. Those who do handwaving without running the numbers may also be correct, but they have far less sense of perspective. Even sketchy calculations add considerable value to qualitative opinions.
Please excuse the length of response, and I hope this helps.
Attachments
Last edited:
Generally speaking, if you're using an NPV in this scenario you would model out the years you're interested in and then add a "terminal value" which should be your estimate of what the shares are worth when you sell them at the end of the valuation period.
For example, I believe you are modelling out to 2040. That means your value in 2030 is the NPV of earnings for 10 years but the company is worthless after that. One solution is to add the "terminal value" year in 2041 giving it 6x-10x 2040 eps (you can deep dive into terminal value calcs if you like as it has its own lore, however 6x to 10x is probably a reasonable range) as a proxy for all future cashflows beyond 2040 depending on your bullishness.
Apologies if I've misunderstood your model.
Last edited:
petit_bateau
Active Member
Similar threads
