Tesla is running again today, up 7% because some analyst report came out trumpeting the stock on the back of Model S deliveries.
Effectively, what Elaine Kwei has said here is that since she thinks Tesla may have delivered a few more Model S’s than forcasted (how many?) and that since she believes Tesla can sell more than 21,000 vehicles for all of 2013 (a few hundred more? A few thousand more?), that Tesla should be worth $130 a share.
Using a 10 year discounted cash flow approach, she somehow worked out this value for the company. Here’s what she didn’t say.
In order to believe this number, Tesla earnings per share would have to grow at 60%-70% per year to break even, with a 10% normalization after that to justify them being priced at $130 today.
Let’s pretend for a second that I buy into this concept which has electric vehicles taking over the country inside of a decade, based on the technology and real world costs we have to work with right now.
Alright – well if Tesla “only” manages to grow at 40% per year, then the stock wouldn’t become worth what this woman is pricing it until 2028.
Do you see the problem here? Still astronomical growth rates at anything less than the 30 meter high bar these people want Tesla to jump over adds time-risk to the equation measured in the half decades.
If Tesla is more of a normal “tech” growth company and pulls 20% EPS growth year over year? That puts it at fair value sometime in the year 2040.
And if Tesla is a 10% annual growth company, then you’ll be looking at breaking even around 2065.
Discounting future cash flow is a horrible method; I don’t know why it hasn’t been thoroughly discredited at this point. It flies in the face of salt-of-the-earth good advice about not counting chickens that haven’t hatched yet. Especially when you’re trying to target these high growth numbers on a company with no real track record, if the good folks at Jefferies have overlooked anything or the unexpected should crop up (as it almost assuredly will), you’re talking tacking on an extra 30 years for being a sucker today. That quadruples the risk folks.
Exponential functions are real terrifying like that…
Keep in mind, the US has averaged a recession about once every decade since the 60’s. Whether it was the Nifty Fifty, the savings and loan crisis, the ’87 crash, oil embargos, unexpected wars, tech market explosions, LTCM smart guy eff ups, housing epidemics,…life never goes as planned.
You can get away with betting stocks act perfectly for about 6 months into the future. You might even get lucky for a year or two. You bet 5 years out that behavior will be constant and you’re pushing it. 10 year bets are usually acceptable when dealing with 2X book, 10x EPS companies because there are average cost chances to get you back to even quickly.
But if you’re buying Tesla at 120x EPS right now, you’re betting that for the next 10 years, the company can basically double year over year without any competition, any economic headwinds, any unforseen problems, any variation from “perfection”.
If you get this wrong, the resulting selloff won’t be “recoverable”. There’s no averaging in you could possibly engage in that will save you in this lifetime.
We are in classic South Sea Company levels of hyperbole here.
For those of us in our 30’s or 40’s, if Tesla stumbles, you’re looking at being in your 70’s or 80’s before you find a recovery. I’d say you have fairer chances of flipping open a mortuary table and betting on whether or not you’ll even be alive by then.
Looking at their current EPS, I’m thinking a price closer to $20-30 is more fair. That puts them at about twice book value (expensive for an auto, but hey it’s a compelling story). You could maybe put up $35-60, a price range which has them moderating to 20% EPS growth after being blessed with a decade of 40% annual growth – which is still a pretty compelling valuation, if you’re being honest with yourself.
Mind you I wouldn’t pay that because I don’t believe that electric vehicles are the future. My personal price where I would maybe think about tipping in is about $10. But listening to the stories you lot are weaving, the price you should be paying is at least half of what you’re doling out right now. Probably more like a fifth, to be direct.
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Well said. I don’t have the report but it’s a shame no rationalization is given to that price target other than a yellow measuring tape wavering in the air ready to snap down under its own weight.
Using a DCF simply does not make sense for this valuation, other than reverse calculating what terminal growth rates could be according to other assumptions. For instance, how many vehicle sales per year at current lot prices does that projected market cap equate? Are the demographics even in place to support that assumption?
This is not an empowering invention that changes the trajectory of the market, yet. What’s the value proposition? It certainly isn’t low cost. For an asset heavy company do we really have sufficient data on maintenance capex or operating expenses for service (car troubles), marketing/selling (inbound/incumbent competition), battery evolution (factory retooling), etc? How about complete lack of infrastructure for fast charging. Can Tesla’s current supply chain scale from its current state? How would exponential growth of vehicles affect electricity demand and utilities? Are the competitive advantages of Tesla really sustainable and proprietary?
I made a half blind folded comparative valuation on twitter comparing price to sales values of all car companies, luxury and diversified. (From May) “BMW trades at 0.62x sales, DAI is 0.42x, and Audi/Lambo is 0.56x. Luxury cars, or any car, trade around 0.3-0.6x sales but $TSLA goes to 11.” Then compare the market caps for each of those companies; it’s not even close.
Thanks for dropping by, Hmmm. Always like your comments.
plebe
Solid value added comment
It’s not my job to hold your hand or add value.
Stay on your momma’s porch.
I’ll bookmark this for a later date.
I’ll be popping champagne on your grave marker.
with a 32% of float short interest, da bears have been thinking this thing is a terrible investment for the last 80-90 points … who knows when gravity takes hold … Musk does have dreams of escaping earths gravitational pull & he just may, taking all shorts to Mars, before he returns to terra firma
Agreed, shorting Tesla is a horrible idea.
Perhaps if the Jeffries analyst had really done some honest research, their note might have looked something like this:
1. We see evidence that TSLA will likely exceed their projected production targets in 2013. However, it will have a negative impact to the bottom line, since most of these units will go to leases that create a massive long-term DEBT liability for TSLA. Given that the whole premise of the TSLA concept is you can build a car company at high margins (Musk: 25%), it would seem this current strategy directly contradicts the CEO’s stated mission.
2. We see a looming threat that TSLA will actually not be able to sell to some of the most lucrative markets in the USA such as Texas, Virginia and North Carolina, since the dealer lobby has essentially shut them out. TSLA will also spend a lot of money in litigation across the country trying to defend its position (pointlessly – according to Forbes), so this too will have a net impact of lower sales and lower net margins.
3. When we look out to a 10 year horizon, we see nothing but roadblocks – dealer networks closing markets for TSLA, technology competition for TSLA in the form of lithium air and other technologies that eliminate TSLA’s competitive advantage (e.g. BMW to introduce lithium air EV by 2014-2015) and natural gas emerging as the fuel of choice in the USA (rather than electricity). CLNE is building out a nationwide supply network for trucks, that will soon be adapted for cars too.
4. European, Asian and other foreign markets are a dead-end, because the cost of installing electric outlets with the AMP rating necessary to power the chargers is either prohibitively expensive or non-existent. Many European and Asian countries have frequent power outages. The last thing they need is another power hog.
5. Given that AAPL took a nosedive from 700 to 400 after Steve Jobs demise, we estimate that the probability of Elon Musk being of sound mind and body for the next 10 years is great, but unfortunately not 100% (since he could, in theory, be hit by a bus or a US drone gone awry). This kills our DCF model – sorry!
Also, GOOG is not interested in ponying up $15B or more for a company that has no moat and non-existent profits.
lmao well said