Valuation

[neroden]

+1
my internal model shows them about a year away from easy-large-scale access to P&L underwritten debt (Bonds) for continued expansion.
Although equity capital will continue- this access will be the trigger for multiple GF expansion IMO
(prepping for that between now and then is my estimation)

I believe the chance of equity issuance goes up every time the stock price goes up (duh...)

Tencent's purchase just made equity issuance even more likely. Tencent, a long-term institutional investor, has just taken 5% of Tesla and probably more off the market, and other "me too" institutional investors are following them. If retail/mutual fund demand for shares remains constant, well, there's less supply now, so....

I have to say if TSLA goes to $500 this year I think equity issuance at that price will be irresistible to management. At *this* price they're doing whatever they can to avoid it, but at a higher price, it's different.

 

[brian45011]

Your concept of "specious and patently absurd" is other people's concept of "black letter law", which shows some lack of judgment on your part.

The excerpt you quoted referred to California--as you express it so graciously "I'll need a specific quote" from the California annotated statutes

Tesla lacks the personnel and infrastructure to deliver and service 500,000+ cars annually. They will eventually enter into arrangements with 3rd parties (some think that is already happening in China and possibly Finland)

Whatever you say about NY. To me, it's a small inconsequential market segment for Tesla. Either Tesla works out a suitable arrangement with the state or that market segment becomes expendable for the greater good

 

[brian45011]

The fact is that no creditor would lend against the Gigafactory (by mortgage, for example) *unless* they were guaranteed that Tesla would stay and that PENA would stay and keep the lease. So you've kind of got it backwards.

I have tried to explain it to you, but I can't make you understand. Lenders are worried about their security in the event of unexpected contingencies, not when things are perking along in the status quo. If Tesla cannot generate sufficient cash from operations to service its debt, the ABL creditors will begin exercising their secured interests. Tesla will not continue to exist in its present form, it will either be re-organized or liquidated. The "customer" for Tesla products in NV is largely Tesla's car manufacturing in California. A potential mortgagor in NV has no idea how Tesla's California operations could be restructured but realizes they would have little say in the process; in the interim while the work-out progresses, the mortgagor would have to perform Tesla's obligations under the PENA lease. Financial institutions are in the business of lending money and do not want to be the landlord of troubled property.

There's something we almost agree on but one little difference which causes us to have huge differences in analysis. You think that Tesla can't issue bonds until its *balance sheet* looks better. I think Tesla can't issue bonds until its *profit and loss* sheet looks better. Now, with the profit and loss sheet looking better, the balance sheet will follow, but there's some lag time on that...

Duh. You can't borrow your way to prosperity. A priori, the balance sheet is not going to improve before the income statement starts showing a positive bottom line. I did not realize you needed me to state the obvious.

That provides Tesla with a lot of opportunity to raise cash through mortgages, once they're profitable and cash flow positive. To be clear on my opinion, the lending market won't open up until they're showing profits for several quarters. I, however, expect this to happen within about a year. This is actually a classic feature of the lending markets. They won't lend you cash unless you're already generating cash internally.

Agreed. Tesla is going to need a lot more capital before it becomes profitable (Over $2 billion in debt matures by mid 2018.) It will come from another equity offering and likely before year end.

 

[neroden]

You didn't understand a word I wrote, brian. Pity, you're very good at digging into financial statements. READ IT AGAIN.

I have tried to explain it to you, but I can't make you understand. Lenders are worried about their security in the event of unexpected contingencies, not when things are perking along in the status quo.

No, not really. That's a strictly secondary consideration. Lenders are worried about getting paid back from current income, first and foremost. Collateral is merely a backstop for an event which they don't want to happen. Have you ever talked to a lender? Income's more important than assets. And they're often backward-looking. With Tesla, the lenders are absolutely concerned about how the status quo is going!

I am talking about how loans on industrial property actually work.

The balance sheet does not need to change much for Tesla to have access to the lending markets, it just needs to be going in the *right direction*. I'm going to repeat this for you since you didn't understand it last time: once the P&L statement and cash flow statements are looking solid, Tesla doesn't need to wait for many quarters for the balance sheet to "develerage" before borrowing more; they'll be able to borrow more simply based on the income.

Companies with no meaningful assets borrow money *all the time* based on profits.

If the stock is still in the sub-$300 range this year, I am pretty damn sure Tesla won't raise more equity this year. Tesla doesn't need any more cash this year. However, if the stock is shooting up to the $350 / $400 / $500 levels before the end of the year, well, at some price it looks really attractive to do so.

The bonds maturing in 2018 can be paid off in cash from Model 3 profits if necessary. If the stock price is languishing, they will be. If the stock price is shooting through the roof, well, then, yeah, stock will be issued.

...though that's my opinion. My main mistake in projecting Tesla's access to the credit markets was that I expected Tesla to eke out a Q4 profit. Which they didn't. So if they somehow manage to not go into profit as soon as I expect, the credit markets will remain closed longer.

Of course I also didn't expect a runup to $260 before March.

 

[brian45011]

You didn't understand a word I wrote, brian. READ IT AGAIN. .

Are you really incapable of understanding the distinction between "not understanding" versus "not agreeing with"?

That's a strictly secondary consideration. Lenders are worried about getting paid back from current income, first and foremost. Collateral is merely a backstop for an event which they don't want to happen. Have you ever talked to a lender? Income's more important than assets. And they're often backward-looking. With Tesla, the lenders are absolutely concerned about how the status quo is going! .

Have it your way! That's why there is Article Nine of the UCC and residential lenders target a LTV of 80% or require PMI and insist on certified appraisals. As you preached "READ IT AGAIN" but I am referring to the ABL Credit Agreement.

The balance sheet does not need to change much for Tesla to have access to the lending markets, it just needs to be going in the *right direction*. I'm going to repeat this for you since you didn't understand it last time: once the P&L statement and cash flow statements are looking solid, Tesla doesn't need to wait for many quarters for the balance sheet to "develerage" before borrowing more; they'll be able to borrow more simply based on the income.

Companies with no meaningful assets borrow money *all the time* based on profits.

Read 10.04 of the ABL Credit Agreement, ... slowly

If the stock is still in the sub-$300 range this year, I am pretty damn sure Tesla won't raise more equity this year. Tesla doesn't need any more cash this year. However, if the stock is shooting up to the $350 / $400 / $500 levels before the end of the year, well, at some price it looks really attractive to do so..

Tesla has no alternative but to sell more equity before year end regardless of the share price.

The bonds maturing in 2018 can be paid off in cash from Model 3 profits if necessary. If the stock price is languishing, they will be. If the stock price is shooting through the roof, well, then, yeah, stock will be issued.

...though that's my opinion. My main mistake in projecting Tesla's access to the credit markets was that I expected Tesla to eke out a Q4 profit. Which they didn't. So if they somehow manage to not go into profit as soon as I expect, the credit markets will remain closed longer.

Of course I also didn't expect a runup to $260 before March.

There will be no profits in 2018. You were wrong about the early conversion of 2018 notes and the warrants; you were wrong about an equity offering toward the 1st part of 1H17, but go on believing your are infallible.

PS There is truth in dem dar SEC filings whether you acknowledge or not.

 

[Fifield]

Not sure if this is useful since I am not experienced in valuing stocks, but hopefully if something can be shown to be corrected you can let me know. This is an analysis of TSLA incorporating some spreadsheets and information other members have previously shared: TSLA Analysis

I wanted to put together a table to show the percentile of expected trading range, relative to historical valuation. I've tried to create an approximation of a lognormal distribution for the stock price based on discounted historical multiples of Revenue and Gross Profit. The table shows the percentile of the stock price per share at quarter end, relative to the average of these multiples. The future PPS assumes a stock price in the same percentile as the most recent close, currently 3/29.

You can download the spreadsheet and change the assumptions, but one thing I found cool, at a 35% annual revenue growth rate it matches Ron Baron's projections through 2025. In his recent CNBC interview the PPS was ~$250, and he stated his expectation was 4x by 2020, another 3x by 2025, then another 3x by 2030. Using 35%, the median expected PPS reaches $1000 by the end of 2020 and $3000 early in 2025.

 

[TheTalkingMule]

Tesla has no alternative but to sell more equity before year end regardless of the share price.

It's finally 2017, are we forgetting the amount of actual products that are coming online this year? The minute Model 3 begins deliveries, 100k additional deposits show up. You know they're going to leverage the long-awaited Model 3 release to take deposits on solar roofs and powerwalls under whatever new co-branded marketing scheme they have worked up.

That's a few hundred million in 3Q/4Q "revenue" with nearly zero associated cost. They're fine.

 

[neroden]

Are you really incapable of understanding the distinction between "not understanding" versus "not agreeing with"?

OK. I was giving you too much credit. You're actually stupid and arrogant about it.

Look, I've talked to lenders. To exaggerate only slightly, nobody gives a flying **** about assets except predatory lenders who are *planning* to repossess.

What matters to normal lenders is income. It is quite possible to get an unsecured loan. In fact, unsecured loans are made *all the time*.

In fact, ha... I remember talking to someone running a startup. The lenders valued all the physical assets -- things which they could repossess and sell, which had ready resale markets -- as *worthless*, but considered the list of potential customers (who could back out at any time) to be bankable. Seriously, not kidding.

There will be no profits in 2018.

This is the stupidest thing I have ever read in this forum, and that's saying something. It's quite clear from this piece of moronic idiocy that you can't read a financial statement.

Are you short the stock? Because if you really believe Tesla won't show a profit in any quarter of 2018 (which is simply idiotic) then you should be short. Go ahead, blow your money...

For those who are less stupidly arrogant than brian, I will simply point out:
-- gross margins on every product are very high
-- most of the overhead (R&D, SG&A) costs for all the products are *already being spent*
-- but the products (Model 3, solar roof, Powerwalls, Powerpacks) aren't actually shipping in volume until later in 2017 / early 2018

There's really no way for Tesla to be showing a loss in late 2018 unless they manage to massively increase overhead costs. Which I suppose they might, but if they want access to the lending markets (and they do) they'd be better off taking a break on the expansion of overhead costs.

 

[Rarity]

Bringing this topic back to the top, I have been watching videos regarding the phenomenon Reid Hoffman calls "blitzscaling." Basically, there are times when it makes sense to utilize capital somewhat inefficiently and to accept breakage in order to grow super-fast into a new market. A corollary is that what it took to be successful at the current stage of the business ramp is not necessarily what is needed to be successful at the next stage in scale.

One of the aspects of the business that Hoffman focuses on is corporate culture. He believes that this is what makes a large organization growing quickly actually work. A small business can communicate goals from top to bottom quickly and efficiently. But a large business must communicate through its culture in order not to lose its way throughout the insane and stressful growth. For instance, on a mass scale, how to attract employees that fit your ideal and repel those that don't fit it? How to attract the customers that you want and repel those that you don't? How do employees know instinctively what the leader would want to spend capital on, given that the employee will not be in direct communication?

I have been viewing Musk's big actions through this lens and appreciate the skill of his recent efforts regarding corporate culture. Amazing to watch, even though he has only recently been working his businesses at this scale. The Tesla secret master plan part 2. The letter to the Grohmann Automation employees. The e-mail to the troops about the role of management and the needlessness of a union (I as CEO will come down to the factory floor and do the hardest and most dangerous jobs). His handling of Trump.

Look around the business world today and I think you will be hard pressed to find another CEO of a 100,000-employee-scale company that you might prefer to Musk on this aspect. The goals of Tesla and SpaceX are crystal clear to himself, his employees, and the world at large. The method that is going to be used is clear as well.

Adam Jonas of Morgan Stanley, an analyst that I normally find provocative but ultimately not very coherent, made an interest point on Bloomberg regarding valuation. If you had $20 billion to invest today and you were thinking who would create the most value with it over the next 10 years, would you invest it in Musk or Mark Fields's successor at Ford? Point being that the Musk premium is real and it is measuring an aspect of the business value that is real.

During the next three or four years, Musk will be scaling his business in a way that could be called blitzscaling. Hopefully, ~100% growth a year. This with a large multi-national investing in the business at a rate of about $4.4 billion a year (capital spend plus R&D). This will require all of Musk's ninja skills on corporate culture. Luckily, the capital markets are open. It was a bit touch and go last year, however.

 

[ValueAnalyst]

My valuation model gives a ludicrous range of valuations. But to a first order approximation, it depends on (a) how many cars they can sell per year of model 3 or other high-volume cars, and (b) how many kwh of battery packs per year they can sell. To a second order approximation it depends on the profit margins on these items, but significantly less. The capital costs start being insignificant to the model once the volumes get high enough, even though the company is very capital intensive; this is all about economies of scale, of course.

I agree with this post 110%.

A lot of time people throw in Amazon as a comparison, especially with regards to valuation.

Here is a good analysis on AMZN's business/financial model. Slightly old but probably mostly relevant.

Why Amazon Has No Profits (And Why It Works)

Yes, thinking around TSLA valuation should start off of AMZN in late 90's, and AAPL in 2006/07, but with some necessary adjustments.

so 2016 tsla == 2004 amzn

2016 tsla definitely will beat 2004 amzn in rev

I think more like late 90's because Tesla is still really a pre-revenue (3/Y/Semi) venture capital investment.

I should warn that high capex is not necessarily good; it all depends on whether it's well-spent. I believe Tesla is making good investments. I don't know about Amazon; they may or may not be. The major oil companies are making *bad* investments with their capex, basically setting money on fire exploring for oil which would cost more to produce than they could sell it for.

The reason I'm uncomfortable with Amazon is precisely because they don't break out much detail on their capex. It could be going into useful expansion, or it could be burned on insane vanity projects of Bezos's, and *investors would not know which*. Amazon's habit of having less and less information in their annual reports each year is suspicious and makes me wary.

Tesla is very clear on where the money is going.

Agreed with the above also. One negative I would point though is that it's not clear at this time if Tesla will ever achieve Amazon's monopoly, but on the other hand, I don't think it was clear in late 90's that Amazon would also achieve today's monopoly.

@Rarity

Revenue growth shows if a company is growing and by how much it is growing.

Cash Flow (FCF or even OCF) shows if growth is healthy or unhealthy.

The above Amazon example shows a very healthy way of growing business.

In comparison, if you ever followed SolarCity, it shows the exact opposite. SolarCity also grew by leaps and bounds but did so in an extremely unhealthy manner. It burnt itself so badly it would have been bankrupt way long ago if not for Musk's heroic rescue in multiple rounds (silverlake deal late last year, personal cash injection in Q3, and finally TSLA merger).

The question we all need to think about is what kind of growth TSLA is executing. Is it healthy or unhealthy.

Growth in itself wont tell you if a company will prosper or if it will crash-and-burn.

I wouldn't put so much credence on OCF/FCF measures at this stage, because Tesla is still a pre-revenue venture capital investment essentially. Once Model 3 is at volume production, then yes, OCF/FCF will be important to valuation, so let's say 2H18. At this point, however, OCF is a function of Model S/X and Cap-ex is a function of Model 3/Y/TE, so there's a massive mismatch, so FCF is not meaningful.

Ok, lets continue with that thought experiment. So a company needs continual money to execute on great product ideas but refuses to make money. So where will it come from? Continually tapping the markets? Naturally, there is a limit to that.

That's the reason why Amazon didn't pursue that path. They didn't care about net-income but always ensured that they maintained positive FCF and a very stable OCF (as a percent to revenue). Still Amazon grew leaps and bounds but never having to come to market for capital. That is the big difference which many people miss when comparing Tesla to Amazon.

Tesla is growing multiple times as fast as Amazon was at $20B revenue. I think it's like 5x as fast.

If Tesla was growing at 20% CAGR, say if Tesla stuck with original 2020 timeline for 500k cars, then it would too show positive FCF.

Ironically, it appears the street would rather Tesla grow slower... there is an additional $700 million in capex in 2016 due to increased pace of Model 3 production.

We need to be very careful guessing what the Street would prefer. Street is a culmination of a lot of different opinions, and buy-side analysts matter more. Street is mostly sell-side.

That lease accounting is so misleading. What we really need to look at in the short term is cash flow straight up (forget operating cash flow, forget free cash flow).

If plain old cash flow (including "financing" of purchasers through lease partners for car leasing and solar panel leasing and so on) is sufficient to get through the first couple of months of model 3 deliveries, then they don't need to raise money through equity or debt until model 3 is delivered. Simple as that.

Agreed. Although Tesla did end up raising some money after your post, Tesla's need to raise capital is vastly overestimated. Tesla has simply chosen to manage is balance sheet more conservatively than other automakers.

Thanks for pulling this together. I haven't had a chance to review in any detail yet but did have a quick question -- is there any reason you exclude cash generated by vehicle sales to Tesla's bank leasing partners?

This is not included in cash flow from operations (I believe that is because it is considered a "financing" activity), but for purposes of assessing cash generated by the company I'm not sure it makes sense to treat cash generated by vehicle sales to end customers differently from cash generated by vehicle sales to leasing partners, who then lease the cars to customers. This amounted to $173M last quarter and $558M so far in 2016, so it has been a significant source of cash. Excerpt from the Q3 shareholder letter is below.

Would be interested in your thoughts ....

"Our cash flow from operations during the quarter was $424 million due to increased sales, coupled with careful expense management. Free cash flow was $176 million as we invested $248 million in capital expenditures to increase production capacity, accelerate Gigafactory construction, and expand customer support infrastructure. Capital expenditures remain on plan to help us reach our goal of producing 500,000 vehicles in 2018. In addition, we collected $173 million of cash inflows from vehicle sales to our bank leasing partners, which are not included in cash flow from operations."​

answer - Not if you assume Tesla will not run into the same residual value issue that's currently choking off traditional automakers.

An interesting podcast with Bill Miller of Legg Mason, who is a value investor.

Investing Legend Bill Miller On Apple, Amazon, And Tesla

He mentioned that Jeff Bezos managed his business to gross profit growth and that Amazon's stock price was highly correlated to its gross profit growth. The idea is that all of the operational costs subtracted after the gross profit is calculated could in some sense be considered investments. The Amazon portion starts at about 18:00.

Focusing on the top-line growth, or as Bezos does on two lines below the top line, seems to be a very useful exercise. Let's leave aside the reasons why Tesla's top line is somewhat better than it has appeared because of lease accounting and the residual value guarantees. I focused on the top line in my simple analysis above. If Tesla can grow the top line at a healthy rate, the rest of it is just details. And we don't then have to argue about what should be included in the costs of revenue. The top line is where the quality of the product can be most easily measured. And it's where the product problems can be seen most easily, such as the late introduction of the X.

Bill also mentioned that he took a close look at Tesla in 2012 and got it completely wrong then. Going forward, he's not a fan because, in order of importance:

(1) Competition from traditional OEMs with vastly greater resources;
(2) Potential removal of subsidies under Trump; and
(3) Merger complicating any analysis of the company.

I don't really respect #1 and #2. I agree that #3 could be an issue inasmuch as SolarCity continues to do more residential PPAs than loan-and-purchase. The Tesla portion starts at about 35:45. Bill also addresses Apple buying Tesla, if you are interested in that sort of hypothetical.

In any event, here are the two relevant AMZN-v-TSLA tables. The first is the top-line growth. The second is gross profit growth. The second table demonstrates just how lumpy Tesla's progress has been and how much Amazon has been killing it recently. That said, I don't think Bezos would dream of 100%+ gross profit growth in year 10 of operations, as we can expect from Musk this year.

View attachment 207072 View attachment 207073

I agree with this post.

Following up on the prior post, here is a refresh of the revenue and gross profit tables, including the year 2016 results.

It is striking that Amazon and Tesla are at exactly the same place with respect to two figures of merit (revenue and gross profits) 10 years into operations. Amazon got to 10 years in a much smoother fashion than TSLA, and on other figures of merit, I'm sure Amazon did much better. Also, I'm amazed at how Amazon has been able to expand gross margins at this point in its existence.

That said, Tesla likely will diverge from Amazon to the upside starting this year. In its 11th year of operations, Amazon grew revenues 22.7%. Even without any additional business (Model 3, Tesla Energy), Tesla is set to grow revenues 60 or 70%. I imagine that such growth on such a base in an 11th year of operations is exceedingly rare and deserves some sort of reward to valuation.

View attachment 218774 View attachment 218775

This is spot on, and TSLA & AMZN will diverge even further in 2018, very strikingly.

+1
my internal model shows them about a year away from easy-large-scale access to P&L underwritten debt (Bonds) for continued expansion.
Although equity capital will continue- this access will be the trigger for multiple GF expansion IMO
(prepping for that between now and then is my estimation)

This prediction proved too conservative, as Tesla was able to tap non-dilutive debt market in early August.

 

[ValueAnalyst]

It doesn't matter much.

It matters that you project extreme confidence in what you have to say with phrases like "I know what I'm talking about" and other phrases that you frequently use to discredit the other person, such as "You seem seriously befuddled and unable to understand what I've written," when you yourself were in fact obviously one hundred percent wrong.

There's a lesson to be learned here, but since you've apparently missed that opportunity many times before, I doubt this time will be different.

 

[TheTalkingMule]

No one's hanging on your opinion of other people's posts, nor do we care who you're beefing with at the moment.

There IS a lesson here....try to post on-topic and not clog up threads with nonsense.

 

[GoTslaGo]

For those (like me) who are interested in learning about Valuation. A great series by NYU Professor Damadoran covering the basics of Valuation. For me the most edifying aspect is that there are multiple types of valuation, specifically:

Intrinsic Valuation, Relative Valuation, Asset-Based Valuation, and Contigent Claim Valuation.

The final summary video may be a good way for noobs to start (just don’t get caught up in the brief details). 25 videos in all.

Nice summary pic:

In summary from what I’ve seen here on TMC and elsewhere.

Most Bears tend to be in the Relative Valuation camp... How can TSLA be worth more than BMW, MB, GM, etc... Why are the multiples higher... etc...

Most Bulls tend to be in the Intrinsic Valuation (listed above as the Discounted Cash Flow Models) or Contigent Claim Camps (whether one realizes or not).

Don’t see anyone using the Asset Based Valuation... then again it is usually a liquation value model.

Long series of videos, but IMHO worth watching to learn.

Then again one could just decide to trade on the technicals...

 

[Rarity]

Following up on this thread now that we are three quarters into the year, I note that Tesla is tracking much higher on most figures of merit than "The Royal Flush" scenario laid out by Damodaran at 17:00 on his video three months ago leading to a valuation of $413 a share. I am assuming that the full year 2018 is "Year 1" and comparing against luvb2b's excellent model. "Musk's Fairy Tale" of not going back to the capital market is looking much less like a fairy tale only three months later.

 

[Tim]

That's terrific. I missed this earlier. What a comically bad prediction from the esteemed professor. Revenue next year could easily be $30 billion just from debottlenecking Fremont and the new battery lines at Sparks. The model Y and Shanghai plants will likely double that again.

Much higher indeed. I wonder what he thinks of the capital efficiency of a tent manufacturing line. That's probably not in his notes on BMW.

Following up on this thread now that we are three quarters into the year, I note that Tesla is tracking much higher on most figures of merit than "The Royal Flush" scenario laid out by Damodaran at 17:00 on his video three months ago leading to a valuation of $413 a share. I am assuming that the full year 2018 is "Year 1" and comparing against luvb2b's excellent model. "Musk's Fairy Tale" of not going back to the capital market is looking much less like a fairy tale only three months later.

 

[jhm]

So we finally have a PE ratio. What denominator is most compelling to the markets? GAAP is conservative and avoids stock-based compensation, which serves to dilute the stock. So I'm inclined to go with the GAAP EPS basic (undiluted) $1.82 for the quarter. Or maybe non-GAAP diluted, $2.90.

Also to be bit conservative, let's suppose the next 3 quarters come in at $1.82, no growth. So 12 month EPS is $7.28. With the stock price at $330. We now have a 45.33 PE ratio. I think this is a pretty good ratio. It could easily go higher, but I'd be happy if the stock tracked 45 PE for a few years.

Why? Whatever the ratio, if price stays fixed to earnings, then the price will grow with earnings. So let's anticipate where earnings could be next year. Revenue 9 months ending Sept 30, is $14.2B. Revenue Q3 is $6.8B. Guidance seems to suggest that Q4 revenue will be slightly higher than Q3. So conservatively, another $6.8B in Q4 closes the year out with $21B. This would be up 78% over 2017 revenue of $11.76B. I think 2019 revenue can easily grow to $32B or more, up a modest 52%. This is averaging a mere $8B per quarter which is up only slightly from $6.8B this quarter. In this quarter, GAAP earnings is at 4.5% of revenue. I think Tesla can enhance that by about 2% in 2019 just be continuing to cut cost out of manufacturing the Model 3. So 6.5% on $32B gets us to $2.1B and $12/sh GAAP earnings in 2019.

So I view $12 GAAP EPS as conservative for 2019. Assuming a 45 PE gets to price target of $540 next year. The dramatic boost here is because we are going from $7.28 EPS to $12 EPS very quickly, a 65% increase. If the market locks on to the idea that Tesla is worth some stable ratio of earnings, then we have earning growth itself to boost the share price.

 

[neroden]

JHM, if you're going to model future earnings and revenue, I *strongly* advise that you do it correctly. That is, model growth in fixed costs, change in gross margin, and growth in revenue as three separate points.

With fixed costs growing very slowly, doubling revenue would probably multiply profit by 4.5x, as someone else calculated. I should go calculate it myself, but my point is, *don't use earnings/revenue as a metric*. It's misleading for any capital-intensive, high-fixed-costs company.

 

[jhm]

JHM, if you're going to model future earnings and revenue, I *strongly* advise that you do it correctly. That is, model growth in fixed costs, change in gross margin, and growth in revenue as three separate points.

With fixed costs growing very slowly, doubling revenue would probably multiply profit by 4.5x, as someone else calculated. I should go calculate it myself, but my point is, *don't use earnings/revenue as a metric*. It's misleading for any capital-intensive, high-fixed-costs company.

The point was simply to get a conservative estimate. If earnings grow more rapidly, that is all good.

Breaking fixed costs out, my $2.08B earnings estimate implies fixed cost growth of 15.6% on a base of $4.926B for 2018. I'm also assuming gross margin (all product lines) goes from 22.3% Q3 2018 to 24.3% for 2019. If I suppose fixed costs grow at just 10%, I get to $2.356B ($13.62/sh) earnings. This is a profit margin of 7.36% as opposed to my rough guess of 6.5%.

In sum, I think 2019 EPS could be in range of $12 to $14, which at 45 P/E implies a share price of $540 to $630. Even $10 EPS looks good for a $450 share price.

 

[neroden]

I think marketwide P/Es are dropping; a $14 EPS at a P/E of 25 would be $350, whereas a $12 EPS would only be $300. So.

 

[jhm]

I think marketwide P/Es are dropping; a $14 EPS at a P/E of 25 would be $350, whereas a $12 EPS would only be $300. So.

The question is, what sort of PE does the market put on a company with organic revenue growth in excess of 50% per year? Personally, I think 25 PE is way too cheap for such high growth, but ultimately the market does what the market does.