A regular reader recently asked how I arrived at $260 as a price target for selling TSLA, which many of you will know I have been trading alongside my younger son for a while.
To some degree, I’ve regarded TSLA in the way I would look at any growth stock. That is to say, I look for signs that the company can grow faster than the market expects and/or would sustain an above-average expansion pace for longer than the market believes.
I then try to use the company’s financial information, plus government, trade association and individual competitors’ data to project an income statement and flow of funds statement for several years into the future.
In TSLA’s case, reliable data are scanty. In addition, the company’s own projections of its production capacity and sales have not been anything to hang your hat on.
Typically, and for a stock I would consider as a core part of my portfolio, I would try to make a projection that I believe to be reasonable, or perhaps mildly aggressive, and would reassess as/when the stock reaches the future target price that projection would lead me to.
In the case of TSLA, however, I did something different. I decided to make an extremely optimistic projection, one I thought would leave the shares at least temporarily overvalued–and which would serve as a sell signal.
This is what I did:
–I decided to make my projection based on 2018 earnings, since I don’t think anyone has the faintest idea of what earnings for years farther in the future will be
–I took the TSLA production forecast, which has proved consistently too optimistic, of 500,000 cars during 2018 as a given
–I decided that most of these cars would be Model 3s, where the average selling price indicated in preorders is about $42,000, as another given. To account for a small portion of more expensive models, I rounded the average selling price up to $50,000
–I examined other publicly traded auto companies worldwide. The highest pre-tax margin I found (yes, although this is a dangerous shortcut, I did use margins) was Porsche, at 15%. I assumed that TSLA would achieve that margin in 2018, even though I think the figure is substantially too high
–I assigned a financial reporting tax rate of 25%, which is probably too low. That gave me net financial reporting profits of $2.8 billion, and earnings per share of $17.10
–I decided to apply a price earnings multiple of 15x to the earnings number, even though auto companies typically trade at single digit valuations. I don’t think TSLA should trade at the 20x+ multiple that an IT stock would merit, so 15x seemed about right. That gave me a valuation, based on 2018 earnings of $257–which I rounded up to $260.
As we can clearly see from a TSLA chart, the stock blew through my $260 target in March-April as if it weren’t there. It peaked, for now, at least, at $386–leaving an embarrassingly large gap between me and it.
Where did I go wrong?
The obvious place is in the PE multiple. The prevailing market view would seem to be that 2019 earnings will be, say, $25/share, and that it’s safe to be factoring anticipated earnings for two years from now into today’s stock price. Another way of saying the same thing, one which I think must be TSLA bulls’ belief, is that TSLA is this decade’s Amazon (AMZN)
That may well be correct. Personally, I’m uncomfortable making the bet, though. One thing experience does tell me, however, is that, barring a total corporate collapse, the stock is highly unlikely to get back to the $180 – $200 range that has marked the lows over the past couple of years.