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Tesla Fundamental Valuation

Discussion in 'TSLA Investor Discussions' started by pavarchin, Jun 30, 2015.

  1. pavarchin

    pavarchin New Member

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    I have never driven a Tesla but have absolutely no doubt that it is a superfine machine and is worth every penny the owner paid for it. However, when it comes to valuation of stock I lose my mind. Why would the public pay so much for something that has absolutely no comparative basis to deserve it. I realize that there are a bunch of insane analysts who, for one motive or another, try to promote the stock. I have not yet seen any justification to value the stock at this current level let alone the analyst's lofty projection. Here is where I am at a loss. Tesla has produced a product that is extremely well received by a small portion of the population that can afford it. I'm going to assume that the profit margin for this line of production and its associated consumer is extremely high. Significantly better than the margin of Lexus, Mecedes Benz, BMW and all the other luxury cars. Where I lose my mind with comments from the so called experienced analysts and experts who promote the stock is their assumption that Tesla can maintain the same margin when it starts mass production for all classes of consumers.
     
  2. Svetlin

    Svetlin Member

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    Welcome to the forum. You've come to the right place to get this question answered.

    Most people here can answer the question much better than I can. Long story short - growth. Ask yourself what would Tesla be worth if 10 years from now they are still making the best cars, and selling 1-2 million a year. Obviously with lower margins than now, as you suggest. And then ask yourself what is to stop them from growing to 5 million cars a year in another 5-10 years. And then add the value from the stationary storage business.

    Look around the threads. I recommend the Long-Term fundamentals, DaveT's megaposts, and the Blind Faith Price Target thread. They've run the numbers, and they look very good.
     
  3. surfside

    surfside Member

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  4. Chickenlittle

    Chickenlittle Active Member

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    Yes you are at a loss
     
  5. Johann Koeber

    Johann Koeber Member

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    Another good place to start would be to drive one of the cars.
     
  6. AudubonB

    AudubonB Mild-mannered Moderator Lord Vetinari*

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    Pavarchin -

    Applying fundamental valuation criteria to young companies, in the tech field, who are attempting to change the paradigm of an established industry, is an extremely tricky task. Good luck.

    Here is a tidbit to mull over. Another company in the automotive sector, one you may have heard of, is called General Motors. It's been around for well over a century and has had ample time to learn both how to make cars and make profits. Yet, over the past fifteen years, GM has net lost over $72 billion, in addition to having all its shareholder equity wiped out during its recent bankruptcy.

    So why oh why is the market giving GM a market capitalization almost twice that of Tesla? One clue: it's not because of fundamental analysis.
     
  7. SteveG3

    SteveG3 Active Member

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    pavarchin, I disagree.

    I've read the projections used by a few of the analysts for future years, and generally, I find them conservative. For three years now, I've done my own modeling of earnings scenarios for Tesla, and recently I arrived at $355 as the current fair value of TSLA stock by using multiple scenarios for 2020 and 2025. For net margins I take Tesla's guidance of low teens down to 10% to be a bit conservative myself. fwiw, my 2025 revenue assumptions are dramatically lower than what Elon Musk has suggested. Over three years, Tesla and Musk have earned credibility with me in terms of projecting margins. I do take Elon's "Apple market cap" statement with a large grain of salt, because part of his role at Tesla is to keep his team pushing ahead with the ferocity of a startup and my sense is sometimes that means setting goals he knows will rally effort but will not be achieved in the timeline he's set.

    I can understand why you may have come to a different conclusion. There are some in the media who repeatedly try to paint Tesla as overvalued, or as Jim Cramer does, try to suggest the company cannot be valued. In my view they are as flatly wrong saying this today, as when they sang this same tune when Tesla traded at $30 and $80 per share. I have some ideas about their motivations (there's a famous video of Cramer talking about the process he used of pushing bs out through the media to try to manipulate stock prices), but what matters is thinking for one's self.

    While I would agree that it is quite rare that the future torrid growth of a company 5 years out, much less ten years out, can be seen with high probability, that is not a reason to deny that such a company can exist or can be valued. If you are lucky enough to come across such a company, if it turns out the company is undervalued, you have a terrific opportunity for a very long term growth holding.

    The main thing that does not get discussed about Tesla by its detractors is that Tesla has extraordinary moats around their growth opportunity, and an extremely high probability of dramatically improving their vehicles vs. ICE vehicles for many years to come. By 2020, it is likely mass market priced Tesla's will be at cost parity at purchase compared to ICE vehicles, and thereafter save the consumer $1-2K per year in fuel. For less money, you will be able to purchase a Tesla caliber vehicle that is decidedly better than an ICE vehicle in most major areas consumers consider (performance, safety, storage, maintenance...), and equal in other areas. You might wonder about other BEVs... there's another key point that never gets mentioned by Tesla's detractors; Tesla is running towards BEVs, while, with the partial exception of Nissan, other automakers are running from BEVs. For example, even GM which recently unveiled a Bolt 200 mile EV prototype, has battery supply for merely 20K Bolts per year. Tesla is creating battery supply for 500K long range EVs per year. Resisting a volume move into EVs is not simply stupidity on the part of automakers. There is a list of quite compelling reasons the other automakers do not turn to EVs... reasons that apply to all of them but not to Tesla (in short, investments in engineering, equipment, personnel, corporate identity, and the individual career and lifestyle security of those running these companies). Finally, when the automakers do find it attractive to turn to BEVs, it will take $1 trillion (at current pricing) and decades to build up battery supply to transition to EVs. Until that point, whatever new BEVs the incumbents do make will just join those from Tesla in replacing ICE vehicle sales, rather than competing with each other for BEV sales.
     
  8. jhm

    jhm Active Member

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    Wow, Audie. I've always been annoyed at the market cap comparisons with other automakers. The set up presumes that these valuations of these others are well deserved, so as to call into question Tesla's valuation as undeserved. But you just ripped a hole into that game. It gets worse because as comparative assumption from the auto industry are applied to Tesla that also leads low valuations for Tesla, but the challenge must be pushed back: do the fundamentals of traditional automakers truly justify market valuations? If not, then there is a much bigger problem with those automakers than with Tesla. It's one thing for a tiny player like Tesla to be overvalued; it's a much bigger problem for an enormous player like GM to be overvalued. In fact, it's the kind of problem that holds economies and taxpayers hostage.
     
  9. MikeC

    MikeC Active Member

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    "I've never used the product and I don't understand the company's long-term trajectory, yet somehow I know that it's overvalued."
     
  10. jhm

    jhm Active Member

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    SteveG3, I commend you for doing your own homework on this and building your own valuation models. This is really the attitude all investors should take. Do your own work and arrive at your own conclusions.

    I would just like to add a little to your comments about battery supply. First, let's put out the caveat that eventually the cost of batteries will come down to $100/kWh and that at that cost it becomes cheaper to manufacture an full range EV than a comparably powered gas vehicle. Tesla believe it can cross that threshold by 2020, and it should have at least 50 GWh of battery manufacturing capacity by that time. This gives Tesla an extraordinary cost advantage over conventional automakers. The critical issue for incumbents is whether they will have enough battery manufacturing capacity at that time to defend market share. So if GM is going to make say 6 million cars with 50 kWh per car, they will need 300 GWh or 6 Gigafactories. Without that supply of batteries they will be at a cost disadvantage competing with other EV makers. This means losing market share while facing margin compression. This is not a happy situation for shareholders and other investors in the likes of GM. Raising the capital needed to ramp up battery production will become increasingly difficult to come by and expensive. Simply hoping that suppliers will arise to make up the gap will also be very expensive. While Tesla makes batteries at $100/kWh for itself, other automakers are paying $300/kWh or more to battery suppliers, and at that price it's still cheaper to make gas engines. So suppliers will not be able to bail out the automakers. Moreover, Tesla is rolling out Gigafactory capacity faster than the rest of the battery industry. So if you really want to know who is competing with Tesla, you need to follow who is rolling out battery capacity. Tesla has the potential to capture and hold a significant share of the battery market, and this may in turn translate into their share of the auto maket. Basically if the industry just keeps pace with Gigafactory capacity, Tesla walks away with half the battery market and half the automotive market. Even if Tesla only captures 5% of these markets, which it could by 2025, it is easily worth $700B.
     
  11. AudubonB

    AudubonB Mild-mannered Moderator Lord Vetinari*

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    Ezzzackully. The other way I've been presenting this analogy is that it's not the Emperor who has no clothes....it's everyone else. Investors get a little uncomfortable when thinking about that, however.
     
  12. Jonathan Hewitt

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    I like SteveG3's answer a lot better but I feel that this answer is more appropriate.
     
  13. Drax7

    Drax7 Active Member

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    Assuming tesla is disrupting the automobile market, which it is, I suggest you read "the gorilla game" by Jeffrey Moore on
    how to value these type of companies.

    Disrupter, with considerable moat , and first mover advantage, business to consumer model with wide mass appeal,
    educate yourself and then let's compare notes. Now read the gorilla game .
     
  14. Johan

    Johan Took a TSLA bear test. Came back negative.

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    pavarchin: you should short the stock. Plenty of money to be made when it goes to zero. You're more than welcome to borrow my shares to sell short, for a small interest.
     

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