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Tesla may be in a bubble, but this article doesn't provide a compelling argument. See Rob Arnott's analysis on Tesla for a more robust bubble argument that's b

Tesla may be in a bubble, but this article doesn't provide a compelling argument. See Rob Arnott's analysis on Tesla for a more robust bubble argument that's based on the financials. Comparing Tesla to Bitcoin is flawed. Tesla is a publicly traded stock that produces products and is subject to financial audits. Bitcoin is completely different and can't be valued like a traditional financial asset. See Robert Shiller's discussion. Tesla will need to make a lot of profit in the future to justify a $442 billion dollar market cap. They'll need to go from breakeven to making around $66 billion a year (for a P/E ratio of 15). Jeremy Siegel wrote a great article in 2000 about how tech companies would need to make massive profits to justify their bubble valuations. It's still a great read.

BenoitEssiambre 6y ago
With the new average inflation targeting monetary regime made official last week, P/E ratios may become permanently higher.
- MrPowers 6y ago
  Yep, it's possible P/E will be higher for a time. Not sure about permanently higher. The US has had dovish and hawkish central bankers in the past. If a hawk is appointed, P/E ratios might go lower. You provide a good starting point for a back of the envelope calculation. Suppose you think Tesla's long term sustainable P/E is 25. Then they need to start making 18 billion a year to justify their current valuation.
  - BenoitEssiambre 6y ago
    Amazon is a pretty mature company and has had a P/E ratio above 100 for most of the past 5 years. With the new monetary regime, more companies may get that type of profile.
    - Retric 6y ago
      Amazon is still seeing 20+% annual revenue growth rates. That’s not what a mature company looks like. Amazon revenue for the twelve months ending June 30, 2020 was $321.782B, a 27.66% increase year-over-year. Amazon annual revenue for 2019 was $280.522B, a 20.45% increase from 2018. Amazon annual revenue for 2018 was $232.887B, a 30.93% increase from 2017. Amazon annual revenue for 2017 was $177.866B, a 30.8% increase from 2016. https://www.macrotrends.net/stocks/charts/AMZN/amazon/revenue https://www.macrotrends.net/stocks/charts/AMZN/amazon/revenu... By comparison Walmart’s revenue for 2018 was $500.343B and it hit $542.026B for the twelve months ending July 31, 2020. https://www.macrotrends.net/stocks/charts/WMT/walmart/revenue https://www.macrotrends.net/stocks/charts/WMT/walmart/revenu...
    - MrPowers 6y ago
      Your comment seems to imply a causal relationship between monetary policy and stock valuations, which is the type of relationship economists investigate: https://www.researchgate.net/publication/322006131_A_Study_on_the_Relationship_between_Monetary_Policy_Variables_and_Stock_Market https://www.researchgate.net/publication/322006131_A_Study_o... I don't know enough about the data to have an opinion. I do know that there are times in history when companies have sustained P/E ratios above 100 for many years (see Japan in the 1980s). You might be right, but from what I've seen, 100x P/E ratios usually come back down to earth.
  - Retric 6y ago
    P/E ratios relate to the ROI possible with other investments. It’s likely that as the world gains more wealth that wealth will face diminishing returns when generating more wealth. The simplest model to demonstrate this an a fund that extracts 1% of it’s value per year. Eventually it’s total returns hits the global GDP growth rate plus inflation. Theoretically stocks should have a lower P/E due to associated risks but eventually a P/E of 20 is very possible.
    - MrPowers 6y ago
      > P/E ratios relate to the ROI possible with other investments. Yes, but P/E ratios also relate to a lot of other factors, like human psychology > It’s likely that as the world gains more wealth that wealth will face diminishing returns when generating more wealth. Maybe, but my (outdated) understanding of the literature is that the equity risk premium has not decreased, even as the world has gotten a lot richer > The simplest model to demonstrate this an a fund that extracts 1% of it’s value per year. Eventually it’s total returns hits the global GDP growth rate plus inflation. Theoretically stocks should have a lower P/E due to associated risks but eventually a P/E of 20 is very possible. I don't understand this logic (could be right, I just don't follow it)
jkhdigital 6y ago
The article is not comparing the fundamental valuation of the two assets, it is talking about bubble behavior. Investors caught in a bubble behave the same way, regardless of the asset class. That's why it's a bubble--the fundamentals are ignored and the "greater fool" theory dominates market decisions. Also, I think it may be a very long time before 15 is considered a "normal" P/E ratio again, if ever. It seems like low interest rates are here to stay.
- MrPowers 6y ago
  I agree with your viewpoints on bubble behavior. Robert Shiller used "bubble behavior" analyses to predict the 1999 tech bubble and the housing bubble in Irrational Exuberance. His book talks extensively about fundamentals and human psychology. Jeremy Siegel also has performed robust bubble arguments. I'm arguing that the blogs bubble behavior argument is low quality because it doesn't discuss the fundamentals and performs an apple/oranges comparison. The bubble conclusion might be right. A good bubble argument should demonstrate how the market price has completely detached from fundamentals.

BenoitEssiambre 6y ago

With the new average inflation targeting monetary regime made official last week, P/E ratios may become permanently higher.

MrPowers 6y ago
Yep, it's possible P/E will be higher for a time. Not sure about permanently higher. The US has had dovish and hawkish central bankers in the past. If a hawk is appointed, P/E ratios might go lower. You provide a good starting point for a back of the envelope calculation. Suppose you think Tesla's long term sustainable P/E is 25. Then they need to start making 18 billion a year to justify their current valuation.
- BenoitEssiambre 6y ago
  Amazon is a pretty mature company and has had a P/E ratio above 100 for most of the past 5 years. With the new monetary regime, more companies may get that type of profile.
  - Retric 6y ago
    Amazon is still seeing 20+% annual revenue growth rates. That’s not what a mature company looks like. Amazon revenue for the twelve months ending June 30, 2020 was $321.782B, a 27.66% increase year-over-year. Amazon annual revenue for 2019 was $280.522B, a 20.45% increase from 2018. Amazon annual revenue for 2018 was $232.887B, a 30.93% increase from 2017. Amazon annual revenue for 2017 was $177.866B, a 30.8% increase from 2016. https://www.macrotrends.net/stocks/charts/AMZN/amazon/revenue https://www.macrotrends.net/stocks/charts/AMZN/amazon/revenu... By comparison Walmart’s revenue for 2018 was $500.343B and it hit $542.026B for the twelve months ending July 31, 2020. https://www.macrotrends.net/stocks/charts/WMT/walmart/revenue https://www.macrotrends.net/stocks/charts/WMT/walmart/revenu...
  - MrPowers 6y ago
    Your comment seems to imply a causal relationship between monetary policy and stock valuations, which is the type of relationship economists investigate: https://www.researchgate.net/publication/322006131_A_Study_on_the_Relationship_between_Monetary_Policy_Variables_and_Stock_Market https://www.researchgate.net/publication/322006131_A_Study_o... I don't know enough about the data to have an opinion. I do know that there are times in history when companies have sustained P/E ratios above 100 for many years (see Japan in the 1980s). You might be right, but from what I've seen, 100x P/E ratios usually come back down to earth.
- Retric 6y ago
  P/E ratios relate to the ROI possible with other investments. It’s likely that as the world gains more wealth that wealth will face diminishing returns when generating more wealth. The simplest model to demonstrate this an a fund that extracts 1% of it’s value per year. Eventually it’s total returns hits the global GDP growth rate plus inflation. Theoretically stocks should have a lower P/E due to associated risks but eventually a P/E of 20 is very possible.
  - MrPowers 6y ago
    > P/E ratios relate to the ROI possible with other investments. Yes, but P/E ratios also relate to a lot of other factors, like human psychology > It’s likely that as the world gains more wealth that wealth will face diminishing returns when generating more wealth. Maybe, but my (outdated) understanding of the literature is that the equity risk premium has not decreased, even as the world has gotten a lot richer > The simplest model to demonstrate this an a fund that extracts 1% of it’s value per year. Eventually it’s total returns hits the global GDP growth rate plus inflation. Theoretically stocks should have a lower P/E due to associated risks but eventually a P/E of 20 is very possible. I don't understand this logic (could be right, I just don't follow it)

jkhdigital 6y ago

The article is not comparing the fundamental valuation of the two assets, it is talking about bubble behavior. Investors caught in a bubble behave the same way, regardless of the asset class. That's why it's a bubble--the fundamentals are ignored and the "greater fool" theory dominates market decisions. Also, I think it may be a very long time before 15 is considered a "normal" P/E ratio again, if ever. It seems like low interest rates are here to stay.

MrPowers 6y ago
I agree with your viewpoints on bubble behavior. Robert Shiller used "bubble behavior" analyses to predict the 1999 tech bubble and the housing bubble in Irrational Exuberance. His book talks extensively about fundamentals and human psychology. Jeremy Siegel also has performed robust bubble arguments. I'm arguing that the blogs bubble behavior argument is low quality because it doesn't discuss the fundamentals and performs an apple/oranges comparison. The bubble conclusion might be right. A good bubble argument should demonstrate how the market price has completely detached from fundamentals.