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This analysis underestimates the probability of higher sales and margins in Tesla's future. Specifically the point where growth will slow down to "auto industry

by marvin 13y ago

This analysis underestimates the probability of higher sales and margins in Tesla's future. Specifically the point where growth will slow down to "auto industry averages". Up this number and the expected net margin a bit, extend the discounted analysis a bit beyond 10 years and use a slightly lower discount rate, and you'll end up with a number higher than $200. This is all guesswork based on unknown parameters; all we can do is assign some probabilistic assumptions. Furthermore, direct comparison with the established auto industry is dangerous, since we are likely to be in the beginning of a large-scale transition to electric vehicles. The established auto industry will have trouble with this transition due to vested interest in internal combustion vehicles. Tesla has already demonstrated that it can tackle innovation on a level the established industry is unable to (cutting out the dealerships, fully utilizing the advantages of electric drivetrain, software-like configuration of cars including battery swap), so from my perspective it seems exceedingly likely that it will at the very least grow into a major automaker. But the upside from this point is discounted by analyses such as the one you linked. That said, I don't really care whether you agree with this. You're certainly welcome to take the other side of the bet; I have my money where my mouth is. Would you be willing to take a short position in this stock?

foobarqux 13y ago
Obviously if you just put in more favorable input parameters you will increase the share price. The entire point of the exercise is to justify your choices: What input parameters exactly give you a >$200 valuation and why do you think they are reasonable? He's already putting margins at top 5% of auto industry. As for discount value he wrote "the value per share that I obtain is not very sensitive to the [cost of capital]": Are you arguing with some other factor that contributes to the discount rate? How common is it for growth to persist over 10 years in the auto or industrials sector? > The established auto industry will have trouble with this transition due to vested interest in internal combustion vehicles. Ford is already shipping an electric Focus. GM has stated they are working on one that will compete with Tesla's $30000 model. > so from my perspective it seems exceedingly likely that it will at the very least grow into a major automaker. But the upside from this point is discounted by analyses such as the one you linked. No, it assumes it grows into a major automaker with revenues comparable to Audi and has margins in the top 5% of the industry.
- marvin 13y ago
  I've presented my case as clearly as I could without writing a whole blog post. You are obviously certain that you are right and that I am wrong by a factor of 3. I invite you to take a short position and put your money where your mouth is. It's a bit annoying to argue with someone who apparently doesn't believe enough in their case to act on it.
  - foobarqux 13y ago
    I'm not certain the $68 valuation is right, the opposite in fact. That's why I was looking for a compelling argument for a $200-300 valuation for which I have found no defensible justification from you or anyone else. Again, valuation is not the same as price and we are not talking about price. Tesla's stock price is not being driven primarily by fundamental value. From the same author: " Once you accept the pricing proposition that the market price is what it is, the key to winning at the pricing game becomes forecasting changes in price rather than assessing whether the current price is right. As a consequence, your focus on news stories will become incremental and each news story will be assessed in terms of how it will change the price, rather than how it will affect overall value." I don't trade individual securities, I wouldn't trade a "hot" stock based on valuation since the price is then driven by other factors and I certainly would be reluctant to short any stock because shorting is a complicated trade: Shorting is a short term play, you need to know when to short or else you will be crushed by fees. You can also be bitten by things like squeezes and acquisitions and the fact that shorting without protection is unlimited liability. Shorting is far more dangerous than going long and even sophisticated professional money managers get burned, even when the stock is actually overpriced. QE-infinity makes shorting even more perilous. What is annoying is that you pretend you did a valuation before investing in Tesla and traded based on the valuation. Now you rationalize the trade to yourself by interpreting information in a way that suits the outcome, post hoc ergo proper hoc. You might make money but it won't be because of any justifiable insight you had.
    - marvin 13y ago
      Well, I'm sorry that I annoyed you ;) If you do find a way to do a proper DCF with mostly-known variables on a growth company likely facing an industry-wide paradigm shift, make sure you capitalize on it by making an exception to your rule of not trading individual securities :P No one has claimed that this is a science, and this includes the hardcore value investors who often miss risks which the market had in fact priced in.

by marvin 13y ago

foobarqux 13y ago

Obviously if you just put in more favorable input parameters you will increase the share price. The entire point of the exercise is to justify your choices: What input parameters exactly give you a >$200 valuation and why do you think they are reasonable? He's already putting margins at top 5% of auto industry. As for discount value he wrote "the value per share that I obtain is not very sensitive to the [cost of capital]": Are you arguing with some other factor that contributes to the discount rate? How common is it for growth to persist over 10 years in the auto or industrials sector? > The established auto industry will have trouble with this transition due to vested interest in internal combustion vehicles. Ford is already shipping an electric Focus. GM has stated they are working on one that will compete with Tesla's $30000 model. > so from my perspective it seems exceedingly likely that it will at the very least grow into a major automaker. But the upside from this point is discounted by analyses such as the one you linked. No, it assumes it grows into a major automaker with revenues comparable to Audi and has margins in the top 5% of the industry.

marvin 13y ago
I've presented my case as clearly as I could without writing a whole blog post. You are obviously certain that you are right and that I am wrong by a factor of 3. I invite you to take a short position and put your money where your mouth is. It's a bit annoying to argue with someone who apparently doesn't believe enough in their case to act on it.
- foobarqux 13y ago
  I'm not certain the $68 valuation is right, the opposite in fact. That's why I was looking for a compelling argument for a $200-300 valuation for which I have found no defensible justification from you or anyone else. Again, valuation is not the same as price and we are not talking about price. Tesla's stock price is not being driven primarily by fundamental value. From the same author: " Once you accept the pricing proposition that the market price is what it is, the key to winning at the pricing game becomes forecasting changes in price rather than assessing whether the current price is right. As a consequence, your focus on news stories will become incremental and each news story will be assessed in terms of how it will change the price, rather than how it will affect overall value." I don't trade individual securities, I wouldn't trade a "hot" stock based on valuation since the price is then driven by other factors and I certainly would be reluctant to short any stock because shorting is a complicated trade: Shorting is a short term play, you need to know when to short or else you will be crushed by fees. You can also be bitten by things like squeezes and acquisitions and the fact that shorting without protection is unlimited liability. Shorting is far more dangerous than going long and even sophisticated professional money managers get burned, even when the stock is actually overpriced. QE-infinity makes shorting even more perilous. What is annoying is that you pretend you did a valuation before investing in Tesla and traded based on the valuation. Now you rationalize the trade to yourself by interpreting information in a way that suits the outcome, post hoc ergo proper hoc. You might make money but it won't be because of any justifiable insight you had.
  - marvin 13y ago
    Well, I'm sorry that I annoyed you ;) If you do find a way to do a proper DCF with mostly-known variables on a growth company likely facing an industry-wide paradigm shift, make sure you capitalize on it by making an exception to your rule of not trading individual securities :P No one has claimed that this is a science, and this includes the hardcore value investors who often miss risks which the market had in fact priced in.