5 ms·

I wonder what underpins these sorts of targets. Tesla has 177.29 million shares outstanding [1]. At $10/share the market cap would only be $1.77 billion. At fir

I wonder what underpins these sorts of targets. Tesla has 177.29 million shares outstanding [1]. At $10/share the market cap would only be $1.77 billion. At first blush that seems like a large discount on Tesla's assets (real estate, facilities, parts on hand, cash/cash equivalents). At the same time Tesla is servicing $12.7 billion in debt [1]. What does $10/share represent? Why not $1 or $30? Genuinely curious about how this sort of calculation would be made and what the assumptions are. [1]: https://finance.yahoo.com/quote/tsla/key-statistics/ https://finance.yahoo.com/quote/tsla/key-statistics/

jcfrei 7y ago
If you are interested in such topics you can read up on valuations in a corporate finance book. With high growth companies like Tesla the majority of the valuation comes from expected future growth. If the expected growth changes the valuation can be dramatically different.
lisper 7y ago
It's all bullshit. I once did some consulting for a very well known person in the financial services industry, a recognized leader in the field. As part of that work I got to see his financial "models". They took the form of the most incredibly complicated Excel spreadsheets I have ever encountered. They were real monsters with hundreds of thousands of rows, dozens of workbooks. Being a software engineer, I wrote some code to reverse-engineer them. I wrote some VB to dump all the formulas as text, and then wrote a parser and code analyzer. The result was a real eye-opener. 90% of the formulas were dead code that didn't actually play into the results at all. The rest was still a mess, but when I started combing through it I discovered that even the live code didn't really matter to the results because at the end there was a "fudge factor" that the guy just set according to his gut feel about the market, and this was the main thing that determined the final result. I didn't last long in that job.
- dnadler 7y ago
  I mean, that sounds like maybe a bad or overconfident analyst, but it's a bit extreme to declare it ALL BS because of one guy's bad models.
  - lisper 7y ago
    Financial analysts use one of three approaches. There's the "whatever my gut tells me" approach, which is surprisingly common. There is modern portfolio theory. And nowadays there's machine learning. And it's all bullshit. MPT is bullshit because it uses volatility as its model of risk, which is IMHO the wrong model. They use it because it's something they can measure and so write academic papers about without sounding like they're just making shit up, but volatility does not actually correspond with what most people consider the word "risk" to mean. It also relies on the assumption that past volatility is a reliable predictor of future volatility for a particular security, which is often not true. And ML is bullshit because if you throw enough data at a regression algorithm it will find something that looks like a signal but will in fact almost certainly just be a coincidence if you actually do the statistical analysis properly. So yes, I'm probably being a bit harsh. There are probably analysts who actually know something, and MPF is actually not totally worthless. But "it's all BS" is a pretty good first-order approximation.
    - asaph 7y ago
      What about the guy played by Christian Bale in The Big Short[0]? Surely his models were not BS. [0] https://en.m.wikipedia.org/wiki/The_Big_Short_(film) https://en.m.wikipedia.org/wiki/The_Big_Short_(film)
      - nradov 7y ago
        The thing is, it's impossible to tell the difference between clever and lucky even in retrospect. It's entirely possible that his models were BS. Even a broken clock is right twice per day.
        foldingmoney 7y ago
- devoply 7y ago
  Survivor-ship bias. Helluva way to make money.
  - mruts 7y ago
    I mean surely you don’t think Goldman Sachs, Morgan Stanley, JP Morgon, etc are still around because of survivorship bias? That is, everyone is just flipping coins and some people got lucky. If you think that’s true, the natural correlary is that all companies are just flipping coins.
    - nradov 7y ago
      Those firms make most of their profit most years from fees, not trading for their own accounts.
- beepboopbeep 7y ago
  100% I've seen the same thing. But they think they're all brilliant masters of the universe. Frightening when you think on how common place that is in the industry. That said, I do believe that the larger firms have begun to evolve away from that.
  - mruts 7y ago
    Firms in finance run the gamut from being breathtakingly stupid to scarily smart. Since the financial crash things have changed a lot (less stupid guys) though.
- dd36 7y ago
  IME analysts build models and use them over and over again, so depending on the modeled company, much of it may not have been active.
dnadler 7y ago
It's typically done by estimating future earnings that "belong" to shareholders, and then computing the current value of those earnings. That's a dramatically over simplified explanation, though. Look up divided discount model (DDM) and discounted cash flows (DCF) for more info. There are other methods as well, but most rely on the same principals.
jacques_chester 7y ago
I can't find the note, only the same quotes from it. I imagine the basic assumption is that if the market is tapped out, revenues will slow, plateau and then begin to fall before Tesla reaches sustained profitability. That means debts will begin to grow again. Current book value is about $26 a share, of which about $12 is cash on hand. If debt remained constant but no new cash came in, book value goes to $14 at the moment of bankruptcy. Discounting for "bankruptcy really sucks for shareholders", $10 is a fairly defensible worst-case.
thoughtstheseus 7y ago
Basically what assets it has like inventory, PP&E, IP, etc. less any debt or liabilities the company has. Typically that sets the bottom range of value. In more distressed situations you would assume the assets are slowly destroyed by the company over time as it continues to operate and wastes the asset before they can be sold.

jcfrei 7y ago

If you are interested in such topics you can read up on valuations in a corporate finance book. With high growth companies like Tesla the majority of the valuation comes from expected future growth. If the expected growth changes the valuation can be dramatically different.

lisper 7y ago

It's all bullshit. I once did some consulting for a very well known person in the financial services industry, a recognized leader in the field. As part of that work I got to see his financial "models". They took the form of the most incredibly complicated Excel spreadsheets I have ever encountered. They were real monsters with hundreds of thousands of rows, dozens of workbooks. Being a software engineer, I wrote some code to reverse-engineer them. I wrote some VB to dump all the formulas as text, and then wrote a parser and code analyzer. The result was a real eye-opener. 90% of the formulas were dead code that didn't actually play into the results at all. The rest was still a mess, but when I started combing through it I discovered that even the live code didn't really matter to the results because at the end there was a "fudge factor" that the guy just set according to his gut feel about the market, and this was the main thing that determined the final result. I didn't last long in that job.

dnadler 7y ago
I mean, that sounds like maybe a bad or overconfident analyst, but it's a bit extreme to declare it ALL BS because of one guy's bad models.
- lisper 7y ago
  Financial analysts use one of three approaches. There's the "whatever my gut tells me" approach, which is surprisingly common. There is modern portfolio theory. And nowadays there's machine learning. And it's all bullshit. MPT is bullshit because it uses volatility as its model of risk, which is IMHO the wrong model. They use it because it's something they can measure and so write academic papers about without sounding like they're just making shit up, but volatility does not actually correspond with what most people consider the word "risk" to mean. It also relies on the assumption that past volatility is a reliable predictor of future volatility for a particular security, which is often not true. And ML is bullshit because if you throw enough data at a regression algorithm it will find something that looks like a signal but will in fact almost certainly just be a coincidence if you actually do the statistical analysis properly. So yes, I'm probably being a bit harsh. There are probably analysts who actually know something, and MPF is actually not totally worthless. But "it's all BS" is a pretty good first-order approximation.
  - asaph 7y ago
    What about the guy played by Christian Bale in The Big Short[0]? Surely his models were not BS. [0] https://en.m.wikipedia.org/wiki/The_Big_Short_(film) https://en.m.wikipedia.org/wiki/The_Big_Short_(film)
    - nradov 7y ago
      The thing is, it's impossible to tell the difference between clever and lucky even in retrospect. It's entirely possible that his models were BS. Even a broken clock is right twice per day.
      - foldingmoney 7y ago
devoply 7y ago
Survivor-ship bias. Helluva way to make money.
- mruts 7y ago
  I mean surely you don’t think Goldman Sachs, Morgan Stanley, JP Morgon, etc are still around because of survivorship bias? That is, everyone is just flipping coins and some people got lucky. If you think that’s true, the natural correlary is that all companies are just flipping coins.
  - nradov 7y ago
    Those firms make most of their profit most years from fees, not trading for their own accounts.
beepboopbeep 7y ago
100% I've seen the same thing. But they think they're all brilliant masters of the universe. Frightening when you think on how common place that is in the industry. That said, I do believe that the larger firms have begun to evolve away from that.
- mruts 7y ago
  Firms in finance run the gamut from being breathtakingly stupid to scarily smart. Since the financial crash things have changed a lot (less stupid guys) though.
dd36 7y ago
IME analysts build models and use them over and over again, so depending on the modeled company, much of it may not have been active.

dnadler 7y ago

It's typically done by estimating future earnings that "belong" to shareholders, and then computing the current value of those earnings. That's a dramatically over simplified explanation, though. Look up divided discount model (DDM) and discounted cash flows (DCF) for more info. There are other methods as well, but most rely on the same principals.

jacques_chester 7y ago

I can't find the note, only the same quotes from it. I imagine the basic assumption is that if the market is tapped out, revenues will slow, plateau and then begin to fall before Tesla reaches sustained profitability. That means debts will begin to grow again. Current book value is about $26 a share, of which about $12 is cash on hand. If debt remained constant but no new cash came in, book value goes to $14 at the moment of bankruptcy. Discounting for "bankruptcy really sucks for shareholders", $10 is a fairly defensible worst-case.

thoughtstheseus 7y ago

Basically what assets it has like inventory, PP&E, IP, etc. less any debt or liabilities the company has. Typically that sets the bottom range of value. In more distressed situations you would assume the assets are slowly destroyed by the company over time as it continues to operate and wastes the asset before they can be sold.