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Who would buy Tesla at a p/e of 810?
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Who would buy Tesla at a p/e of 810?

Maybe the same people who bought Amazon and Google, and dozens of other companies, when they were losing money?

Elan
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Who would buy Tesla at a p/e of 810?

Well, let's see. Nobody uses a metric like P/E to value a growth company like Tesla. P/E just isn't useful to measure companies that are growing that fast.

So your question doesn't even really parse. But I think you already know that there are people who do quite well in the market while ignoring P/E as irrelevant to the companies they invest in.

-IGU-
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Maybe the same people who bought Amazon and Google, and dozens of other companies, when they were losing money?

Perhaps. Although Tesla now has five straight GAAP profitable quarters, so it really can't be said to be losing money any more. And next quarter is going to be outrageously GAAP profitable, and even more so non-GAAP.

There are also quite a few investors who want to put their money in companies that are doing what they can to fix the world rather than destroy it. They invest in Tesla rather than fossil fuel companies (or Amazon or Google).

-IGU-
(heavily invested in TSLA starting in 2013)
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No. of Recommendations: 27
Who would buy Tesla at a p/e of 810?
...
Well, let's see. Nobody uses a metric like P/E to value a growth company like Tesla. P/E just isn't useful to measure companies that are growing that fast.
So your question doesn't even really parse.


If you change it only a bit, it makes sense.
A not-bad way to value almost any kind of firm is like this:
What's the ratio of the price now, to the earnings 5-10 years out?
This works pretty well for high growth companies with no current profits, as well as no-growth cash cows and utilities.

Assuming a high market multiple after that time frame is not wise--who knows will happen more than a decade out?
So it's reasonable to assume that every kind of firm will have a multiple not above the teens by then.
So, you can build rules of thumb:
If the current price is under 10 times the almost-certain average EPS 5-10 years out, you'll almost certainly do well.
If the current price is under 12 times the almost-certain average EPS 5-10 years out, you'll probably do nicely.
If the current price is over 20 times the almost-certain average EPS 5-10 years out, an unpleasant surprise may possibly be in store for you.

So, I figure shareholders in Tesla fall into the following broad camps:
* Those who hold it via funds of one type or another, and never actually picked the stock themselves.
* Those trading the shorter term price squiggles, which is a zero sum game. It can work well, as with MI, but the competition is tough.
If the price comes back down to earth, they have to have sold before that or the big gains were just temporary numbers on a screen.
* Those that think that Tesla's EPS will average at least $35/share 5-10 years from now. Seems implausible to me, but if that's their reasoned expectation it's cool.
* Those who haven't really noticed that all firms trade at a multiple of 15 some day.
So they haven't really thought about what it would take to justify current valuation levels.

Assuming no dilution (a very generous assumption), for Tesla to manage EPS of $35 5-10 years from now would require average total company profits of $32.7 billion/year.
At the moment there are only two US companies managing that...even Alphabet doesn't.
So, it's quite the hurdle, and that's just to get to the "probably do nicely" category of 12 times future earnings.

If they average a net margin of 5% in that stretch, it would require sales to grow at a compound growth rate of 54%/year for a decade.
That doesn't happen often. About two or three companies have managed it, as far as I know.
Opko Health has managed it. According to Yahoo, the share price is the same as it was in 1986.

So, it could all turn out well for today's shareholders.
Personally I think it's unlikely, but opinions can differ.

Jim
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Opko Health has managed it. According to Yahoo, the share price is the same as it was in 1986.

Wait; what? Why??
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Who would buy Tesla at a p/e of 810?

Folks who also bet on the hot hand at a craps table.

Eric Hines
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Feb 2020:
In a newly released research and modeling by one of Tesla Bulls’ favorite analysts Tasha Keeney and fellow ARK Invest analysts Sam Korus and Brett Winton, Based on their updated expectations for electric vehicle (EV) cost declines and demand, as well as their estimates for the potential profitability of Robotaxis, in 2024 popular electric car maker Tesla is expected to reach a value per share of $7,000.

Ark Invest has a Golden Goose with a 12% probability that Tesla share will hit $22,000 price target if Tesla dominates the Autonomous RoboTaxi industry and successfully wipe out all dinosaurier ICE car makers. This model is said to be based on Tesla lowering cost, builds more factories around the world efficiently, and launches its autonomous network.

Ark Invest has a price target of $3400 in a No Autonomous case, but Tesla will become a High Functioning Ev Company. This case has a 28% probability and a 70% cumulative probability. This case Predicts Tesla will lower costs and build factories efficiently, but can’t launch its autonomous network.

In Ark’s Bear Case: there is a 25% likelihood that Tesla trades at or below $1500 in 2024.

In Ark’s Bull Case: There is a 25% likelihood that Tesla trades at or above $15000. A median expected value equals $7000 based on expected value being greater than median value due to upside skew from autonomous.

According to Ark research and modeling three key independent variables are critical to understanding Tesla’s potential:

Gross Margins – Will Tesla’s cost of manufacturing vehicles continue to fall in line with Wright’s Law? If so, what will be the average selling price of Tesla’s vehicles?

Capital Efficiency – What is Tesla’s cost per unit to build new production capacity?

Autonomous Capability – Can Tesla launch a fully autonomous taxi service successfully?
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Opko Health has managed it. According to Yahoo, the share price is the same as it was in 1986.
...
Wait; what? Why??


Strange, right?
But they had no revenue for a long time.
The magic of easy comps.

I guess it depends on the particular date range you choose.
I think VL, from whom I grabbed the growth figure, uses a two or three three year moving average for revenue growth rates. I'm not sure.

They say report sales per share figures that look like this:
2004: zero
2005: zero
2006: zero
2007: zero
2008: 5 cents
2009: 5 cents
...
2017: $1.91
2018: $1.69
2019: $1.35

So, for example, three or four year averages ending 2018 are compound growth rates over 60%/year for ten years.
Four year average ending 2019 is a mere 53%/year.

Jim
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beats me. But I bet people were sayin that at 400
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"Who would buy Tesla at a p/e of 810?"

Folks who also bet on the hot hand at a craps table.



Y'know, there is a lot of survivorship bias running around.

Google wasn't the first search engine. Amazon wasn't the first online book seller.

There's a guy here on TMF who retired in his 30's a rich millionare, because he invested heavily in (I believe) DELL. WHen questioned, he says anybody could have done it, but he was the smart one and all the rest were dummies.

But there was Dell and Digital Equipment and Compaq and a bunch of others. Dell just happened to be the one that got lucky. Ditto GOOG & AMZN.
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Ark Invest has a Golden Goose with a 12% probability that Tesla share will hit $22,000 price target...

It amazes me that people get paid for producing this horse manure, but then I remembered that the more outrageous the pronouncement the more clicks they get.
(that's a market cap of $20.5 trillion--I'm pretty confident that the chances of that are smaller than 1 in 8)

The firm can certainly do well, but even if so, to make a profit as an investor you have to rely on one of two things:
* Waiting for it to happen and selling at a fair price, or
* Selling at a high valuation multiple to a greater optimist before it happens.

The second approach is tempting, but not reliable.
Maybe there will be a shortage of optimists when you want to sell, and remember the great future hasn't yet arrived.

Which leaves the first one.
The key factors to consider there are: great future, OK. Let's say that happens.
How soon will it happen, how much are you paying in advance for that today, and therefore what is the implied
rate of return between now and when they inevitably have a multiple under 20 on normal earnings?

e.g., Mr Blodget was right saying in 1998 that Amazon would do very well.
https://www.wsj.com/articles/SB913824043106358000
But his forecast of $10 EPS in five years (by 2003) was too early by a factor of four...it took 20 years.
If he had known then that $10 EPS would be achieved only in 2018, what would he have estimated as the fair value to pay for a share in 1998?
Here's the million dollar question, hard to answer honestly:
Given perfect knowledge on the 20 years of future earnings but not the future stock price trajectory, what number would you have picked in 1998 as a fair price to pay for a share?
The price did much better that anyone had any right to expect...including those who had perfect foresight of the 20 year earnings trajectory.
This is the exception that keeps the rubes gambling.

As an aside, a random clip from that link:
"In addition, Mr. Blodget said that because Amazon is a retailer, its business model will ultimately resemble that of other retailers.
[credit where credit is due!]
...
In fact, Amazon was only the second-most-traded issue on Nasdaq Wednesday. The top spot was taken by Books-A-Million , another online retailer, whose stock soared 80%


Rather surprisingly, Books-A-Million is still in business.
Bought out in 2015 by its chairman for $21 million, down from a little under a billion in 1998 when the article was written.

Jim
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No. of Recommendations: 8
It amazes me that people get paid for producing this horse manure...

ARK (https://ark-funds.com/active-etfs) does some pretty impressive modeling, and makes it public (https://github.com/ARKInvest/ARK-Invest-Tesla-Valuation-Mode...), along with the trading activity in their funds. Every day. ARK's analysis is done by a team comprising individuals who are competent in the fields relevant to the companies being analyzed, as opposed to the typical analysts used by most funds who understand little other than finance (and often not even that). ARK has been doing pretty well for themselves. And, of course, they don't really get paid for their analysis, but rather make money on the performance of their funds.

I started putting the money I would otherwise keep in cash into ARKK (https://ark-funds.com/arkk), ARKW, and ARKQ back in August. So far it's up about 20%, so I'm pretty happy. Better than cash would have done. And better than the S&P 500, which is up ~5%.

So what do you think might happen to the stock price of a company that has been growing its revenue from its main business since 2012 by over 50%/year? Then add to that that it's growing another business with a greater total addressable market even faster, which it expects to end up about the same size as its primary business. That's Tesla's automotive and energy businesses. Do you think it's irrelevant unless they use the revenue to generate "earnings" and thus a good EPS instead of reinvesting it into growing their business?

The possibility that they solve autonomous driving is a wild card that simply makes the potential upside even bigger. Their very limited release of their new software this past week looks quite promising. I can't wait to try it, likely some time in December after it has gone through a couple of iterations. From the look of it, anybody who doesn't take seriously the possibility that Teslas bought any time since mid-2017 will drive themselves at some point within the next few years does so at their peril.

To be clear, my Teslas already drive themselves over half the time that I'm nominally the one driving. I fully expect that to become over 90% some time within the next year. I think this is an upside wildcard to which attention must be paid.

-IGU-
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(that's a market cap of $20.5 trillion--I'm pretty confident that the chances of that are smaller than 1 in 8)

The $22,000 price target made by ARKW in February was pre-split, so it equates to $4,400 post split. That means the projected market cap is only about $4T (not $20T). By comparison, MSFT has a current market cap of $1.65T, so they're saying that TSLA has a 12% chance of being a little more than twice as valuable as Microsoft.

And, to be fair, their median price target for 2024 is $1,400 post split, which is a market cap of only $1.1T (far less than what MSFT is valued at today).

I know better than to make predictions, but I think these market cap projections for Tesla are quite plausible. Remember that dominant companies in trillion-dollar markets like retail and energy are incubating services that you can't easily predict how disruptive they are. For example, could you have predicted that Amazon would expand from books to electronics, and then to provide a fulfilment platform for 3rd party sellers, then to create Amazon Prime and grow that to 100 million plus members, then to create a whole new industry of Cloud computing generating $30B of annual revenue? Or could you have predicted that Netflix would expand from DVDs by mail, to streaming content on demand, and now producing big budget movies and TV series?

Tesla already generates 6% of its revenues purely in battery products (not cars), and that product, by itself, is projected to compound sales at 50% annually over the next 8 years.

https://cleantechnica.com/2020/09/24/forecasting-tesla-reven...

I admit that I missed Tesla as an investment, and chose instead to invest heavily in SaaS companies over the past 4 years instead. No regrets. But the reason I missed TSLA has nothing to do me balking at the P/E ratio. A P/E ratio is a meaningless trailing figure for a growth company that is in the middle of a hyper-adoption curve. The reason I missed it is that I understand SaaS companies really well (I work in this field), and I have a poor understanding of electric vehicle companies.

As for Mark's original question about who has been buying Tesla shares recently, the answer is hundreds of asset managers and financial institutions. Ray Dalio (billionaire founder of Bridgewater Capital), Wells Fargo, CALPERS (pension fund for teachers), D.E. Shaw (the hedge fund that Bezos used to work at) - they all own millions of dollars of Tesla shares and have been adding lately.

-Ron
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Maybe the same people buying Saul type stocks with no earnings at all. Most of them have made a lot of money.
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