Comment by bitops | Hacker News Reader

Comment by bitops | Hacker News Reader

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> Not a fun day to be a Tesla shareholder

Only if you're fickle and lack conviction. People are talking a lot about "is Tesla at a fair valuation" and I personally believe that it's impossible to know what a fair valuation is until a few more years have elapsed.

I could reasonably see Tesla bouncing back to $300/share over the next 18 months or staying at or around $200. The current drops are more likely related to general market unease and opportunism rather than anything endemically wrong with Tesla. Also, with "momentum" stocks I'm sure some people got in looking to make a quick buck and also some people are surely taking advantage of the general shutdown-related cacophony to short the stock so they can buy it at lower prices (I would).

Fluctuations like this illustrate why one of the most important qualities an investor can have is patience. If you're trying to get rick quick, you'll be in trouble. But if you invest in solid companies that you understand, you should do well. Provided you do your homework, of course.

I'll reiterate Peter Lynch's excellent advice from "One Up on Wall Street" - if the stock drops but the fundamentals still make sense, stick around to see how the story develops.

You talk about fundamental value and then throw out a $200-300 share price. What valuation methodology could possibly come up with that absurd number?

The correct stock market value of a company is the discounted sum of all its future earnings. This number is impossible to calculate, but investors can estimate it with probabilistic models (a discounted cash flow model, taking into account the probabilities of different scenarios).

E.g. a simplification of such a model would be to create some plausible-looking probability histogram for the "fundamental" value of the company in 10 years. Many investors believe there is a significant probability that Tesla will be worth >100 billion in 10-15 years, i.e. one of the world's major automakers (perhaps one of the largest) due to a global shift to electric vehicles and its 5-year head start and patent moat. It's probably worth noting that multiple major analysts have performed such a DCF analysis and arrived at a number in this ballpark.

Under these assumptions, a $200-300 share price isn't absurd. I can agree it's speculative and extrapolating a lot. But on the other hand a $40 price as some analysts are calling for, is IMHO more absurd since it ignores some very likely growth prospects. If companies were always valued on "fundamental" value, buying growth stocks would be guaranteed to make you a massive, market-beating return.

Can you pointed me to one of these "major analysts" who has come up with $200-300 fundamental value along with a detailed explanation of how they came to that number?

Short answer, no. I don't have access to the actual reports since they are reserved for paying customers, but prominently Deutsche Bank ($200), Northland Capital Markets ($230) and Global Equities ($225) all have price targets considerably higher than the current market price. All of these companies stake their reputation on being right, as most professional analysts do.

http://www.streetinsider.com/rating_history.php?q=TSLA

If you have access to analyst reports, the one from Deutsche Bank is probably the one to look at. The best source I can find is this video from August before the recent PT upgrade, but there was an interview somewhere where Dan Galves goes into more detail about the DCF model they are using.

http://www.cnbc.com/id/100946446

http://www.streetinsider.com/Analyst+Comments/Tesla+Motors+%...

Main point being, there are people with a solid economics background who disagree with your claim of absurdity. You're of course welcome to put your money where your mouth is and short; Tesla was for reference the most-shorted stock on the NASDAQ at $30/share.

Price is not the same thing as value and analysts are usually wrong (search for the studies). The important thing in a valuation are the assumptions: You can come up with any number you like, the reader has to decide whether they agree with how you got there.

Here is a justified valuation of $67. Tell me what assumptions are wrong how how that would yield a value of >$200.

http://aswathdamodaran.blogspot.ca/2013/09/valuation-of-week...

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?

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.

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.

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.

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.

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