Tuesday, March 28, 2017

Revisiting Tesla

        In honor of Tesla approaching new highs, I went back to a Aswath Damodaran and I wrote in early 2014.  At that time, we were trying to explain the run-up in Tesla's stock price for the 30s to over $250.  We failed.  We found that the most optimistic DCF model that we could defend did not lead to a value exceeding $100.  To get to that level we had to make aggressive assumptions regarding growth in revenues and profits.  How aggressive?  By 2016, we projected that Tesla would have revenue of about $7 billion and operating profit of about $200 million.  Those projectsions rose to $11.5 billion in revenue and $450 million in operating profit in 2017.

        In fact, Tesla's actual revenue in 2016 was $7 billion, close to our projection, but the company's had an operating loss of $667 million.  Despite the introduction of the Model 3, the company is almost certain to lose money again in 2017.

      All this has had no effect on the stock price.  Tesla today, from a valuation standpoint, is Tesla 2014 all over again.  The value depends on the massive and profitable future growth.  This waiting for Godot type of valuation is not unique to Tesla.  Amazon, now more than thirty years old, still trades at a P/E of over 170 based on future growth expectations that have continued to ramp up over time despite the relatively low level of earnings and earnings growth.  But Tesla is not Amazon, it is primarily an automobile manufacturer and as such has to make cars profitiablely and in volume.  That is not something that can be postponed indefinitely a la Amazon.  By December, we should finally know where Tesla stands.

Wednesday, March 15, 2017

This Time is Different

        Though attempting to time the market is hazardous at best, there is one guide I use - the notion that "This time is different."  I take this as a guide because in my view it virtually never is.  In the depths of the depression and the during the crash of 2008/2009, many people thought the world had changed for the worse.  In 2000, it was the reverse - the world was changing for the better.  In retrospect, it was not changing very much at all.  From my standpoint, it is reasonable to be wary about the Trump rally for the same reason.  Rationalizing the high current level of stock prices because President Trump is going to deliver to a new world of tax reform and reduced regulation is an exercise in what I believe is undue optimism.  The status quo is much stronger than most people give it credit for.  So when you hear, the phrase "this time is different" the best reaction is generally no its not.  And the best investment advice as well.