They're extremely profitable, but they still contribute to Tesla profits and Tesla revenue that are factored into the P/E, and are still tiny in comparison to the current valuation.
Current valuation prices in future potential. And it's logical for it to do so. It's irrational to look at P/E and determine a company's value based on that.
Here's a thought experiment. It's not a realistic one and is not supposed to prove that Tesla is not overvalued, but just out of interest, I'd like to see some responses.
How would you value a company that has $10,000 profit this year and is expected to grow in profit 50% each following year and this growth would last infinitely?
What about a company that is expected to grow 50% each year until $1T profit?
I don't think anyone here has argued that possible future value can't override current P/E in principle. I'm certainly not arguing that. It's pretty obvious and well established.
It's even possible Tesla will eventually improve it's P/E ratio by at least 50x to reach a more typical figure. That's also quite plausible, after all the big car giants now weren't always world dominating conglomerates. No problem there either from me.
Where I think the current valuation departs from reality is the time it is likely to take to do that, and the risk that it won't happen at all. The current valuation only makes sense if that 50x ramp up in scale is pretty much guaranteed (not 10x, not 20x, but 50x at least) and will also happen in a few years. Technically they could be betting that the growth will be a lot more even than that, far bigger than the current entire car market, but with increased risk I suppose. I don't think that's what's happening though.
What's actually happening is these recent investors over the last 6 months have simply bet that the Tesla share price will shoot up in the near terms and they'll be able to flip the stock to turn a rapid profit, and they've been right. They've made no bet at all on Tesla's long term prospects. That's why Elon tweeted a few months ago that he thought the stock was over-valued.
It's doesn't matter. Tesla's stock price is around 450 times its cash flow, which is an order of magnitude beyond insane for a public company. Apple is around 30. The average S&P500 company is around 15. For Tesla's stock to be worth the same relative to the company's business as Apple the stock should be 15X less than it is now. To justify this price they would have to sell 15X more vehicles. Apple's gross margins are like 30%, cars are probably just a few % due to the complexity of making something as big as a car. Unless Tesla becomes the only seller of cars in the world, there is no way it will ever be worth the current price.
Stock prices are always based predicted returns over time. Their revenue growth for 2020 was 40%, 2019 14.52%, 2018 82.51%, and 2017 67.98%.
So, you really need to predict when that stops before you can get a reasonable estimate for sock value.
A more reasonable 144x in 2022 after 2 years of ~40% growth is the equivalent of ~282x today. That’s not exactly the huge drop people are expecting. In other words I do expect a drop, but I don’t expect short selling is a great risk adjusted investment.
If you go to MSN Finance page for a stock, look at the Financials tab, Cash flow tab you see the value. Price/Cash Flow is a metric that can't be manipulated like P/E can since its based on revenue not profits.
Not quite. Growth and incremental returns on invested capital could greatly influence where a stock should trade. The market could be assuming Tesla doesn't have to expand factory capacity much after Germany or the margins on vehicles will go up as more customers purchase the self-driving option. Sometimes it's usual to assume a question to be true such as "what if every Tesla buyer bought the 'self-driving' package? next year and Tesla sold 30% more cars?" If Tesla is still trading at 100x cash flow in this unrealistic scenario?
Sure, and in theory directly selling to customers and manufacturing a higher percentage of parts should allow them to extract more profit per vehicle than using dealerships. EV’s also allow car companies companies to profit from ‘gasoline’ sales as the lower operating costs are linked to higher purchase prices.
However, none of that supports the insane increase in Tesla’s stock price over the last 2 years. That’s likely an artifact of so many short sellers which ironically drive up the price faster if a stock starts to rise, and with a 40% increase in revenue in 2020 some rise would be appropriate. As the saying goes the market can remain irrational longer than you can remain solvent.
I suspect that the Supercharger network will quickly become commoditized as charging stations appear everywhere. Every grocery store, mall, parking lot, and restaurant will put a few chargers in. This will be mostly to defend their business so that people with electric cars continue to patronize instead of going to a competitor with an electric car.
BTW: From what I understand, gas stations don't make much profit from the gas. I suspect the same kind of economics from operating a car charger.
A quick look at their 10Q does not show that their Energy generation and storage business is extremely profitable. It eeks out a small profit before operating expenses. That may change in the future. It is also a small business relative to their car business.
Conceptually, I understand that’s the path, however, practically speaking, shorts have expiration dates, which haven’t been kind to Tesla shorts. How do I counter my S&P 500 investments over exposure to Tesla?
The Model 3 is a nice car, on the order of a Honda Accord nice. But, copy the performance of a Model 3, and wrap it in a BMW 3 series, and I’d take that all day, every day. So, what’s the barrier to other manufacturers making a competitive electric car? The battery packs of others are becoming competitive. The motors are nice, but nothing science fiction there. Yes, the Model 3 software is great, but in the recent updates, mine has become slow, so Tesla isn’t immune to putting out problematic software. I’d prefer more physical buttons over the current Tesla offering. The VW ID.4 looks extremely competitive to the Model Y. I just get an Apple Fanboy vibe out of Tesla owners. Yes, I have an iPhone and a Tesla, but I’d be willing to consider the Android of cars. With Apple rumored to enter the electric car space, there are many reasons to doubt Tesla’s long term dominance to demand such an elevated stock price. Do
I really want my stock portfolio over exposed to Tesla? No.
Perhaps what you’re thinking of is a margin call, which you can avoid by leaving cash in your account. If it becomes too expensive you can sell some long positions to cover.
I don't have a clue about economic realities (especially not now in late 2020), but current market value is the market's bet on possible future earnings, not current state of affairs.
Maybe the market's valuation is a lot of people betting on Tesla being able to scale up dramatically in a pace that current car manufacturers will not be able to catch up with. Not entirely unthinkable.
Yep exactly. This is also why the "GDP vs stock market cap" graphs for different countries don't really make that much sense - or at least, they portray different things than they are designed to portray.
It is definitely true that the US market cap has become "decoupled" from its current economic output, but as you say, that is a (rationalised) prediction about the state of affairs in the next year or three, it's not "oh no everything is cer-aazy!"
The theory how to scale up car production is well known, and the established players like Toyota are already masters at that (lean and just-in-time manufacturing were after all invented at Toyota). It's Tesla who's having issues with scaling up production[1].
We're in the middle of a turning point in the car industry. I'd wager in 2-3 years sales of electric cars will already be a sizeable chunk of the market. Within about a decade electric personal cars will take over sales of petrol cars. But nothing suggests that VW, Toyota etc. would not be any less apt at producing electric cars than Tesla. On the contrary, the established players have a MASSIVELY superior pre-existing production capacity and expertise.
Agree for 12V car batteries, AA batteries, etc... but not for EV batteries.
The form has not standardized, they evolve quickly, they can not be purchased in the volume required by all producers, and a better battery and matching charging infrastructure is a major competitive differentiating factor among EV manufacturers.
The hard part of electric vehicle has never been assembly - its batteries and charging. Toyota and VW can ramp up as much as they want, but they'll probably have to buy the batteries from Tesla.
Tesla is not without its problems, but I think it's a bit naive to focus on the solved problems as limiting their potential. It's also the wrong thing to look at - Tesla is concerned about dictating the future of transportation and energy, selling cars is a means to an end.
What Toyota and VW have is politics and that's why they are still trailing behind Tesla. Big parts of their engineers and managers have expertise and background in internal combustion engines and this means much more coupling with this technology. A turnaround in such businesses is much harder than in software, so I expect that only those of the traditional manufacturers who can rebuild their strategies and sell it to their middle management to survive the next decade or two.
Why would Toyota and VW need to use Tesla batteries? Patents after all expire and are circumventable. And AFAIK Tesla does not hold too much original IP on battery tech to start with.
Physical products cannot scale like software or social network products. This is especially true of cars, which require billions in capex just to create the factories that produce the cars. Perhaps 15 years from now Tesla could catch up to Toyota but certainly not the sum total of the big 7.
Are future earnings relevant to people who plan to sell stock at a profit? Stock traders’ earnings come from selling the stock not from a company’s earnings. It’s greater fools all the way down.
The modern stock markets have been insane since at least the 90s, and I bet there are some underlying banking and finance rules which led to the changes in overall market sanity.
If you go back in time, value investors really dig into companies to try to understand their current and probable future values.
Also, I believe it was rare or never that companies could pull off an IPO without some history of profitability.
At least since the dot-com era, hype-only (no valid financials) IPOs became common.
I suspect the whole VC funding ponzi system had something to do with this. Uber was my favorite example... years of never-profit, but rather multiple higher rounds of funding and then IPO.
But at least in the case of Tesla, they not only have managed to build actual cars that sell well, but more importantly they are a battery company. This last bit is probably a big part of their future valuation.
The malinvestment seems to be a byproduct of low interest rates, too many investment dollars facing too few returns, and increasing wealth inequality (further driving too much investment capital).
Which means worrying about fundamentals like cash flow to market cap is meaningless. Those days are over. It is all about supply, demand and liquidity. Stock prices are a popularity contest and banks are full of cash so they are in no danger of crashing like in '08.
It’s some weird perversion of our systems that an entire class of people are able to pump a company’s books in private and then dump them on the market for pension funds and retail investors (aka working people) to pick up the debts. This VC thing is just class warfare in disguise with more steps.
I’ve heard YC Alumni talking openly about building something and then “selling it to dentists in Nebraska”.
They are talking about pumping up a stock and unloading it on some working class rube (well, thousands of rubes) who topped out at the education + service tier.
I don't think it is a new phenomenon. Insanity is just part of human nature. In his book "The Intelligent Investor" Benjamin Graham constantly refers to irrational "Mr. Market". The book was written in 1949. Go back even further in time and find Dutch going crazy over tulips. And so on.
The best advice I have ever been given: Just ignore the market noise. Invest in a broad ETF and stay in for as long as you can, don't look at your balance until then (which I still do).
From $10,000 to $1T would take
almost 46 years. Guaranteed growth of 50% per year? I mean, what’s the point of this hypothetical question if it is completely unrealistic?
You could also ask: how much would you be willing to spend right now to receive 1 billion in 46 years?
Are you allowed to cash out earlier? Can your children inherit it? Can I borrow money to buy this guaranteed payoff?
Okay let's just simplify. How would you value this company? What would be fair share price you would consider buying in assuming for example it has 100,000,000 shares? Either question works.
I'm not sure if you're quizzing people or asking for a way to value a company like Tesla. In which case I would recommend Aswath Damodaran's blog, where he's done that a few times, so you can see his methodology.
With a market cap of 50T the stock would return 2% dividend eventually. And banks can currently get loans from the US government and other funds for around 0.03%. So if you were a banker and you got a loan for 50T from the US government as long as interest rates remained low for the next 21 years you would have a company making 20B in profit and a cost of 15B servicing the debt. And the next year it would be 40B in profit and 15B costs.
So the question you are asking is what are rates going to be for servicing debt over the next 20 years? If rates go up to 8% 50T is probably too high for the stock.
The reason TSLA's stock is so low currently is because there is no guarantee that it will continue to grow at the same rate over the next 15 years.
So then it becomes about understanding risk. Let's say we are able to determine that there is 10 percent chance that this company will succeed or 90 percent that it will fail completely, how would you then value the company right now?
I guess my point here is to figure out how companies should be valued. I think to accurately value something you will need to estimate different most likely timelines and endings for a company and come back from there.
I feel like anyone who does a blanket claim of TSLA or any other stock being overvalued has not done such calculations. Also I am not claiming Tesla is not overvalued, but just that you can't be this sure without doing those calculations.
I am finding it so hard to find someone to have this discussion with.
Yes, you're right. It is about risk. There are hundreds of things that could go wrong on Tesla's path to converting the world to Autonomous EV transportation. No one knows which if any of those things will go wrong over the next 5-10 years. I'm not a day trader, so for me, saying that Tesla is overvalued today is like saying that people who buy flood insurance are stupid because there is no rain the 10 day forecast.
If TSLA was $100k/share today then yes it would be overvalued. Just like if someone was paying $100k/month for flood insurance on a 200k house in the desert that would be stupid.
For my analysis Tesla has a decent chance at building a 25k profitable EV and 5-6 other models at scale and succeeding in Autonomy within 5 years. So I'm comfortable buying today at anything below $1200.
Funny you mention insurance. One way to think about buying tech stocks right now is to insure yourself against new "industrial revolution" type of thing, but more like "tech/ai revolution". I feel like I need to have at least something allocated in all of the tech companies that might be part of that revolution. Eventually unless governments are able to stop it, it seems like larger companies might grow even larger compared to others and it will be a very complex challenge to stop that monopolization. If Tesla success will be sure to happen it will be too late by then.
It seems like FOMO and it is, but I think it is very reasonable.
I don't invest in Tesla because I hope to double or triple short term, I just want to be part of what might very reasonably happen.
They make damn nice products, but I feel like you aren't really getting for what you think you're paying for.
The FSD option isn't a real thing yet. You've effectively paid for a promise of a feature (if they ever deliver it?). While I do see the value in the data they've collected, I haven't been very impressed with their autonomous driving promises.
Before there was FSD, 'autopilot' is what they marketed as their driverless offering.
Market reflects future not present . That is how I take it.
Tesla in itself is a fully vertical car Company
+ Chip Company (think Nvidia)
+ Battery/Electrical/Electronics Company (Custom Battery Cell)
+ Materials Company (Custom materials including Aluminium n leather)
+ IT Company (Self Driving Division)
+ Automation Company
From the article: "What they’re saying: “Tesla shares are in our view and by virtually every conventional metric not only overvalued, but dramatically so,” wrote Ryan Brinkman, a JPMorgan analyst, in a research note."
"Yes, but: Tesla makes cars, but they could also be categorized alongside pure tech or electric vehicle companies. It is early in the "golden age of EV playing out globally," says Dan Ives, an analyst at Wedbush Securities."
If Apple is truly entering the car market, then Tesla’s valuation is validated by an attachment to this confidence on growth from a player like Apple.
It will only come back down to reality after Apple hits the market and we see the true competitive numbers across the car makers (or until Toyota goes harder at EV), but until then, it’s a future-minded investment into a sector where we are expecting stronger players.
It would be the same as being 10x bullish on cellphones years in advance with the belief that smartphone companies will validate the market beyond our wildest imaginations.
I spend a considerable amount of time there, not for highly insightful dd for my investments or because I am a true believer in daddy Elon, but because it is hilarious
This is boring because it lacks the type of imagination that Elon Musk's companies tend to bring to fruition. I would like to see this type of article rewritten for a scenario where Tesla Network is up & running. Would the stock price still be mania in that scenario?
I'm far more comfortable investing in TSLA than IBM. IBM has had a great run and made major contributions to computing over the past 50 years. But now it is a sham company that tricks executives into buying buzzword bingo services. When enough people get burnt by their lack of results their reputation will take a turn and they will have a downward spiral. Orcl will buy them within the next 10 years.
Yet another hit piece. These stupid media puppets are in the business corrupt practice of writing hit pieces for a cozy profit no matter who funds them.
They (Big Fossil) are not evil as long as they pay these “media” houses cozy bribe.
84 comments
[ 4.4 ms ] story [ 157 ms ] threadA quick skim of the article makes no mention of Tesla's other businesses.
Here's a thought experiment. It's not a realistic one and is not supposed to prove that Tesla is not overvalued, but just out of interest, I'd like to see some responses.
How would you value a company that has $10,000 profit this year and is expected to grow in profit 50% each following year and this growth would last infinitely?
What about a company that is expected to grow 50% each year until $1T profit?
It's even possible Tesla will eventually improve it's P/E ratio by at least 50x to reach a more typical figure. That's also quite plausible, after all the big car giants now weren't always world dominating conglomerates. No problem there either from me.
Where I think the current valuation departs from reality is the time it is likely to take to do that, and the risk that it won't happen at all. The current valuation only makes sense if that 50x ramp up in scale is pretty much guaranteed (not 10x, not 20x, but 50x at least) and will also happen in a few years. Technically they could be betting that the growth will be a lot more even than that, far bigger than the current entire car market, but with increased risk I suppose. I don't think that's what's happening though.
What's actually happening is these recent investors over the last 6 months have simply bet that the Tesla share price will shoot up in the near terms and they'll be able to flip the stock to turn a rapid profit, and they've been right. They've made no bet at all on Tesla's long term prospects. That's why Elon tweeted a few months ago that he thought the stock was over-valued.
https://www.nasdaq.com/market-activity/stocks/tsla/price-ear...
So, you really need to predict when that stops before you can get a reasonable estimate for sock value.
A more reasonable 144x in 2022 after 2 years of ~40% growth is the equivalent of ~282x today. That’s not exactly the huge drop people are expecting. In other words I do expect a drop, but I don’t expect short selling is a great risk adjusted investment.
So I guess that's what the grandparent meant.
Link: https://ir.tesla.com/
However, none of that supports the insane increase in Tesla’s stock price over the last 2 years. That’s likely an artifact of so many short sellers which ironically drive up the price faster if a stock starts to rise, and with a 40% increase in revenue in 2020 some rise would be appropriate. As the saying goes the market can remain irrational longer than you can remain solvent.
Not to mention the biggest benefit of EV’s is charging at home.
BTW: From what I understand, gas stations don't make much profit from the gas. I suspect the same kind of economics from operating a car charger.
https://www.sec.gov/Archives/edgar/data/1318605/000156459020...
Yes, that is exactly how an ETF is supposed to work. If you don't like it, don't buy ETFs. There's hardly a shortage of investment options out there.
Perhaps what you’re thinking of is a margin call, which you can avoid by leaving cash in your account. If it becomes too expensive you can sell some long positions to cover.
Many people will not have any say or choice in these type of funds investing their money.
Maybe the market's valuation is a lot of people betting on Tesla being able to scale up dramatically in a pace that current car manufacturers will not be able to catch up with. Not entirely unthinkable.
It is definitely true that the US market cap has become "decoupled" from its current economic output, but as you say, that is a (rationalised) prediction about the state of affairs in the next year or three, it's not "oh no everything is cer-aazy!"
We're in the middle of a turning point in the car industry. I'd wager in 2-3 years sales of electric cars will already be a sizeable chunk of the market. Within about a decade electric personal cars will take over sales of petrol cars. But nothing suggests that VW, Toyota etc. would not be any less apt at producing electric cars than Tesla. On the contrary, the established players have a MASSIVELY superior pre-existing production capacity and expertise.
[1]: https://www.reuters.com/article/us-tesla-batteryday-producti...
They need batteries for those cars. Are they also investing in battery production?
The form has not standardized, they evolve quickly, they can not be purchased in the volume required by all producers, and a better battery and matching charging infrastructure is a major competitive differentiating factor among EV manufacturers.
Tesla is not without its problems, but I think it's a bit naive to focus on the solved problems as limiting their potential. It's also the wrong thing to look at - Tesla is concerned about dictating the future of transportation and energy, selling cars is a means to an end.
If you go back in time, value investors really dig into companies to try to understand their current and probable future values.
Also, I believe it was rare or never that companies could pull off an IPO without some history of profitability.
At least since the dot-com era, hype-only (no valid financials) IPOs became common.
I suspect the whole VC funding ponzi system had something to do with this. Uber was my favorite example... years of never-profit, but rather multiple higher rounds of funding and then IPO.
But at least in the case of Tesla, they not only have managed to build actual cars that sell well, but more importantly they are a battery company. This last bit is probably a big part of their future valuation.
They are talking about pumping up a stock and unloading it on some working class rube (well, thousands of rubes) who topped out at the education + service tier.
This is viable exit strategy for many.
The best advice I have ever been given: Just ignore the market noise. Invest in a broad ETF and stay in for as long as you can, don't look at your balance until then (which I still do).
What would you pay for a company that currently has profits of $10,000, but is guaranteed to grow each year 50% until they have $1T in profits.
If possible give a numerical value please, what you think a) The company is worth currently b) How much would you pay for 1% of this company's stock?
You could also ask: how much would you be willing to spend right now to receive 1 billion in 46 years?
Are you allowed to cash out earlier? Can your children inherit it? Can I borrow money to buy this guaranteed payoff?
http://aswathdamodaran.blogspot.com/2020/01/an-ode-to-luck-r... (in video form at the bottom if you prefer)
So the question you are asking is what are rates going to be for servicing debt over the next 20 years? If rates go up to 8% 50T is probably too high for the stock.
The reason TSLA's stock is so low currently is because there is no guarantee that it will continue to grow at the same rate over the next 15 years.
I guess my point here is to figure out how companies should be valued. I think to accurately value something you will need to estimate different most likely timelines and endings for a company and come back from there.
I feel like anyone who does a blanket claim of TSLA or any other stock being overvalued has not done such calculations. Also I am not claiming Tesla is not overvalued, but just that you can't be this sure without doing those calculations.
I am finding it so hard to find someone to have this discussion with.
If TSLA was $100k/share today then yes it would be overvalued. Just like if someone was paying $100k/month for flood insurance on a 200k house in the desert that would be stupid.
For my analysis Tesla has a decent chance at building a 25k profitable EV and 5-6 other models at scale and succeeding in Autonomy within 5 years. So I'm comfortable buying today at anything below $1200.
It seems like FOMO and it is, but I think it is very reasonable.
I don't invest in Tesla because I hope to double or triple short term, I just want to be part of what might very reasonably happen.
They make damn nice products, but I feel like you aren't really getting for what you think you're paying for.
The FSD option isn't a real thing yet. You've effectively paid for a promise of a feature (if they ever deliver it?). While I do see the value in the data they've collected, I haven't been very impressed with their autonomous driving promises.
Before there was FSD, 'autopilot' is what they marketed as their driverless offering.
Please add if I missed something Good starting point would be https://www.youtube.com/c/MunroLive/videos
Checked Ryan Brinkman's rating: https://www.tipranks.com/analysts/ryan-brinkman
Not very great performance...
On the other hand:
"Yes, but: Tesla makes cars, but they could also be categorized alongside pure tech or electric vehicle companies. It is early in the "golden age of EV playing out globally," says Dan Ives, an analyst at Wedbush Securities."
Dan Ives rating: https://www.tipranks.com/analysts/daniel-ives
Everyone can draw their own conclusions, of course.
It will only come back down to reality after Apple hits the market and we see the true competitive numbers across the car makers (or until Toyota goes harder at EV), but until then, it’s a future-minded investment into a sector where we are expecting stronger players.
It would be the same as being 10x bullish on cellphones years in advance with the belief that smartphone companies will validate the market beyond our wildest imaginations.
[0] https://markets.businessinsider.com/news/stocks/tesla-stock-...
https://markets.businessinsider.com/news/stocks/tesla-short-...
If you are less confident about it you can buy a put to limit your downside risk.
They (Big Fossil) are not evil as long as they pay these “media” houses cozy bribe.