what I find most surprising about Tesla (TSLA)

a concept stock

My California son got me interested in TSLA a couple of years ago.

It’s a “concept” stock.  That is, the stock trades on the dream or vision of future revenue and profit.

…like Amazon

In many ways, it’s like Amazon (AMZN) was in the late 1990s.

That company seemed to me to be on the verge of financial disaster for most of the first decade of its existence.  It only began to be profitable after it expanded from its original virtual bookstore idea to becoming an online department store.  In my view, had AMZN not aggressively raised a lot of capital during the Internet Bubble, it would not have survived.  After all, it lost money eight (?) years in a row before breaking into the black.

the center of an empire

TSLA is the seat of the Elon Musk empire.  Some say it’s a car company (me included); some would characterize it ultimately as a battery company, with cars as the wrapper that contains the principal TSLA product.

the stock

The stock is now trading at $260 or so a share, giving TSLA a market capitalization of about $39 billion.  Suppose we think, to make up a number, that the stock should trade at 30x earnings.  If so, the current price expresses investor belief that at some point the company will be making $1.3 billion a year and still have, say, 20% growth in annual profit in prospect.

back of the envelope numbers

Let’s say TSLA is a car company and that it will be making on average $7,000 a car, after tax, on its output at some future date.  If so, the current market price already factors into it that TSLA will be selling about 200,000 cars a year–and expanding rapidly.

I think that’s possible.  More important, the market says that’s what investors are willing to believe, and pay for.

risks

There are risks, yes, the most obvious of which is that the company keeps pushing back the date when it will turn cash flow positive.  What cash flow positive means is that the company will be able to generate enough cash from operations to cover costs, and will no longer be eating into its cash reserves to make ends meet.

what I find surprising

What’s stunning, though, is that less than two months ago the stock was trading at just over $141, or just over half today’s price.

New information has come out since then:

–TSLA began taking deposits for its $35,000 base price Model 3.  In less than a week, it has collected $1,000 each for about 300,000 units, with enough add-ons to bring the average selling price to $42,000. Most won’t receive their cars until 2018.  This support seems to me to show there’s potentially huge demand for electric cars, even at today’s lower oil price.

–the company announced that it missed its 1Q16 sales target because of parts shortages.  Presumably this means it did not turn cash flow positive as anticipated during the quarter.  That’s bad, especially since we’ve heard this song before.

the stock price

The stock is up $10-$20 a share on the two items, which were announced at roughly the same time.

What I find interesting is that a relatively large market cap company can move from $140 to $240 in a matter of weeks on a change in sentiment.  That’s about 70%!

So much for efficient markets and investor rationality   …not that anyone outside the ivory tower believes in this stuff.  But this is a huge move.

algorithmic trading?

I think it’s evidence of relatively naive algorithmic trading at work (based ultimately on two other wacky academic ideas–that the most important thing in investing is to control costs, and that there’s no craft skill/specialized knowledge involved in investing).

I also see it as support for my view that trading can be unusually profitable in this environment.   We should look for other instances where this may be happening.

 

 

 

3 responses

  1. hi

    thank you for the interesting blog.

    can you please explain why in Tesla pricing you have assumed an annual growth in profits of 20%? was there any math behind it or any rule thumb?

    thanks
    miki

  2. Hi Miki,

    Thanks for your comment. The short answer is that I made the number up.

    But it’s not completely random.

    If we think that inflation in the US will remain something around 2% for a long while and that the US economy can grow at 2%+ in real terms (1%+ annual growth in the workforce, 1%+ growth in productivity), then trend nominal growth of US GDP will be something around 5%. If we also assume that the US operations of the S&P 500 represent the best and brightest we have, then domestic profit growth for the S&P should come in somewhat higher than that, at, say, +7%. Throw in another couple of percent for faster-expanding foreign operations, and a baseline guess for the trend rate of yearly S&P 500 profit growth should be something in the neighborhood of +8% – +10%.

    So the main thing about my 20% figure is that it’s twice the rate the S&P is likely to grow at. I could have picked +30% just as easily.

    In order to maintain an above-average PE multiple, a company typically has to grow faster than the market expects for longer than the market thinks is possible. Once investors sense that growth is slowing, the PE typically contracts pretty violently. So the only way I think TSLA can support a 30+ PE in a few years is if investors continue to believe the company will keep on growing at a very rapid rate. That’s all I intended to convey with my +20%.

    Dan

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