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Attached is an updated comparison of Amazon versus Tesla with regard to revenue and gross margins. I also included Netflix, in case you find it helpful.
Tesla is growing at historic rates -- it is now twice the size of Amazon was after 12 years of operations. And they managed to not go bankrupt meanwhile. Truly remarkable.
That said, Amazon's performance in the last five years in expanding gross margins is amazing.
Tesla is growing at historic rates -- it is now twice the size of Amazon was after 12 years of operations. And they managed to not go bankrupt meanwhile. Truly remarkable.
That said, Amazon's performance in the last five years in expanding gross margins is amazing.
Why is either Revenue or Gross Profit rather than Net Income the appropriate metric ? What does Mr. Market use once a company starts reporting something other than losses?
Revenue is the toughest figure of merit to fake over time and gives a good approximation of a company's scope of operations. Gross profit is looking very broadly at how much is available to be reinvested in growth. For example, Amazon Prime and free shipping could be looked at primarily as an expense. But up to now, Amazon has looked at both of those items primarily as an investment. For Netflix and Amazon Prime, is content creation primarily an expense or an investment?
Regarding net income, in the case of Amazon, for a couple of decades it more or less broke even. Despite this fact and some long periods of stagnant valuation, Amazon's valuation tracked revenue growth.
This paradigm is of course not perfect and is only one of many ways to view valuation. It may be losing some of its utility, now that Amazon cannot successfully keep to breakeven -- too much money is flooding through the door from AWS. And Tesla is pushing for profitability for some reason. But in comparison to the quite limited utility of approaches like Damodaran's to fast-growing companies like Amazon, Netflix, and Tesla, it may still be the best approach.
Look at Damodaran's latest Tesla video. The poor guy is helpless in valuing Tesla (even though I find his views provocative and interesting). And he's the guy who wrote the book on valuation. For sure he's on my bookshelf.
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Here's Damodaran's most relevant slide, his "Royal Flush" scenario. The base year is Q2 2017 through Q1 2018. Nine months later, it's so far off to the downside as to be remarkable. On revenue and operating margin, Tesla jumped to Year 2. On free cash flow to the firm, Tesla jumped to Year 4.5.
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Buckminster
Well-Known Member
Tesla have jumped to Year 8 on FCF if you consider last 2 quarters...
Damodaran's model will give up next time he updates:
"Does not compute"
Following up on this, for a fuller discussion of why gross profit growth is a primary figure of merit, take a look at my post about Bill Miller noting that Amazon's stock price was highly correlative to gross profit growth and that Bezos managed to gross profit growth.
Valuation
In pertinent part, here is what Bill Miller said in a podcast a few years ago.
Investing Legend Bill Miller On Apple, Amazon, And Tesla
So that's what led down this path of tracking gross profit growth.
Very helpful posts on TSLA/AMZN/NFLX comparison — thank you.
Did want to flag that there seems to be something wrong with your spreadsheet’s 5 year CAGR calculation — for AMZN, TSLA and NFLX it overstates the rates by a significant margin.
For example, AMZN’s 2018 5yr CAGR is listed as 33% but 74.45B to $232.9B in 5 yrs (2013-2018) is a CAGR of less than 26%.
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Thank you for catching that. Will revise with the new issue of that post at the end of January.
I was looking to see what Damodaran had to say about Tesla's run-up this year and came across his February video where he discusses a few key figures of merit. He also includes a spreadsheet so that you can enter your own assumptions.
My assumptions are the following...
(1) 50% revenue growth. Could be higher. The next two years could be barnburners. Growth this year will probably be higher than I expected as well.
(2) 15% operating margins. I think that Tesla probably will target this. Could be higher if the robotaxi fleet rolls out.
(3) 4x sales to invested capital. Honestly, I don't know what that should be long-term. But it seems like Tesla gets a lot for its money.
(4) 7% cost of capital, no chance of failure. Since February, we have raised a lot of equity and Tesla no longer has a high debt load. It seems like assigning a high chance of failure is unwarranted.
(5) 50% CAGR on revenue.
Using these variables, we are now at fair value.
My assumptions are the following...
(1) 50% revenue growth. Could be higher. The next two years could be barnburners. Growth this year will probably be higher than I expected as well.
(2) 15% operating margins. I think that Tesla probably will target this. Could be higher if the robotaxi fleet rolls out.
(3) 4x sales to invested capital. Honestly, I don't know what that should be long-term. But it seems like Tesla gets a lot for its money.
(4) 7% cost of capital, no chance of failure. Since February, we have raised a lot of equity and Tesla no longer has a high debt load. It seems like assigning a high chance of failure is unwarranted.
(5) 50% CAGR on revenue.
Using these variables, we are now at fair value.
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