Wednesday, a NYU professor put out a post on his personal blog talking about everyone’s favorite, Tesla (TSLA).
My readers know my own frustrations with the stock and personal contempt for its valuation (which is not to be confused with contempt for its product) – even if they don’t understand it.
The professor created a model you can download and play with, putting in various assumptions to spit out different ends. The verdict?
He has no idea why Tesla is going for this much either.
While he did say there were a few outcomes which were as profitable for current buyers as they were farfetched, the probability of realizing those outcomes is dismissible.
This guys seems to have done more in depth work than I did. I just grabbed the growth estimates and studied the exponential curve generated from those assumptions…then recognized any variance is no friend of TSLA shareholders.
It’s worth pointing out that all of the assumptions this professor used to reach his conclusions are actually very optimistic, in the favor of Tesla. Even after that, he still can’t reach the current valuation. If you use my colder, less favorable assumptions, you get to my numbers…
At this time, I still hold my TSLA puts, with targets in the $30’s and $40’s. They have basically been cut in half (spaced out 6-18 months out from purchase), but constituted an investment of about 2-3% of my account at the time of purchase.
If you enjoy the content at iBankCoin, please follow us on Twitter
Glad I sent the article to you. In the end, we have the same sediment on valuation, and I adore Musk and what the company stands for.
amazom = tesla = game changers
Pricing in sentiment can drive you nuts
These typestocks favor momentum traders.
cheers
Amazon is trading at 2x sales per share. Tesla is trading at almost 15x sales per share.
I get that earnings are not the only important thing. This isn’t that hard a concept.
Tesla is still overvalued by almost every metric available, and even if I start substituting variables for hard numbers here and playing with them, you’re talking “miracle” levels of outcomes to justify where it’s trading at right now
Maybe you don’t work in the car industry 😉 …no, but seriously, you will be proven right in your put buys. Good luck in the trade and fuck the haters, it’s usually how you know you should add to a position as you well know, sir.
(laughter) I definitely don’t work in the car industry, and there’s a ton I don’t know about auto
I was forced however to tell you that insurance companies work on administrative fees
Does anyone really argue that the valuation of TSLA based on traditional metrics isn’t very stretched/rich/insane? Clearly the consensus agrees that valuation is at nosebleed levels, but is that really what drives the stock price at this point? As a cult stock, TSLA trades on sentiment, hope, dreams, greed. At some point this will be deflated. But what happens in between that time period? And how long is that interim time period? The pain trade in TSLA is that it goes higher, not lower, and despite the run-up in price, the float is still heavily shorted (25% give or take), which can imply that it is still a fairly crowded short (albeit not as crowded as it was in June./July).
To be clear, I have no position in the name, mostly because I’m terrified about both going long or short at this point. In other words, I’m not confident in the risk/reward for the trade in either direction. But clearly, some traders are very confident in their directional bet.
Will valuation really be the catalyst that drives this stock lower and breaks the back of the cult of TSLA? I doubt it. Your trade would be much more attractive from a risk/reward standpoint if there was a tangible catalyst that you believe will be the spark that finally breaks this camels back.
This is similar to AAPL longs late last year. The stock went from roughly $700 to $550 in short order. There was a somewhat tangible catalyst that drove AAPL down at first (lack of innovation, declining margins, loss of market share, Samsung competition, sell the news event regarding capital allocation strategy). The whole way down, value investors and members of the AAPL cult exclaimed at how cheap the stock was relative to peers/sector/market. Sure growth was declining, but look at that P/E multiple! Look at all of that cash just waiting in the wings to be aggressively deployed towards buybacks, a venerable atom bomb of capital waiting to be allocated to explode the stock back to its former greatness.
But it never happened. The story was over (for the time being), the sentiment had shifted, and the cult was running for the exits.
Valuation didn’t make a single iota of difference, as the stock was “cheap” the whole way down. Just playing devils advocate, but what will make valuation finally matter for TSLA?
No, of course not. An unforeseen event none of us can possibly predict will drive Tesla lower.
Valuation is just the cliff that makes it possible
Giving some thoughts to your option play here, and coming to a couple of conclusions: First, projecting a 30-40 level based on “developing” fundamentals might make sense but it would make sense to also include some areas of technical (price and volume) support f for sure there are long term holders at your levels, still… Second, since you’ve developed an option exposure (which seems like sound risk management when it comes to shorting stocks headed for the stratosphere), why not fnance your long puts by selling some pricier ones and doing a ratio write for a little net cash?
Fine, I’ve not done my homework today, but can you write 170 puts and buy 150s and end up with a comfortable ratio out six months? Perhaps you want to wait untl closer to earnings and play with less time, a tighter spread and the same ratio – maybe even a calendar spread extending over earnings?
PoitiveCarry, above, stresses the need for a catalyst – that’s sound, and there’s no need to pinpoint the catalyst – if you figure out when the catalyst is most likely to arrive.
I’m sure I could get very tricky, but for the moment I’d prefer to just keep it straightforward.
Great input though.
GREAT THREAD GUYS
CHEERS
There are a lot of rich granolas who love Tesla and hate math.
Amazing discussion. Thanks everyone.
There are many brilliant accounting math types that sit still churning their accounts instead of capturing a great move in this company.
The market can stay irrational longer than you can stay solvent. There are a few stocks in the industry that I’ve learned you just stay away from, especially the short side. Amazon, Goldman Sachs, and Tesla are among those.
Which is why I’m using options…