- Cramer calls Tesla a phenomenon and says it is becoming integrated into society.
- But... UBS and Standard & Poor's call it a sell.
Who's right? My calculations aren't worth a lick because as a fundamentalist, I just can't justify the price tag.
P/E's don't work.
EV/EBITDA is pointless.
P/FCF. Nope. Throw it out the window.
ROE? Sorry for asking.
Well let's back out and look at the bigger story and see whether we can find clues about the value of TSLA.
Is Tesla Fueled by Hype or the Vision of the Future?
For 99% of stocks, missing guidance and delivery numbers is enough to cause the stock price to tank. Based on the latest report, 2015 Q4 shipments and 2016 Q1 shipments dropped from 17,272 to 12,420.
Reliability issues are known, parts supplier mishaps are frequent and they also need to build and maintain their own "gas stations" as well as run their "car dealerships."
If you watch this interview of Musk with Khan Academy, he tells of how production literally halted due to a USB cable. He had people go to all the RadioShacks, Frys and other electronic stores and buy every USB cable in order to continue with production.
Plus, when you look at the barriers Tesla is breaking down, you start to ask what Tesla really is. One thing for sure is that they can't be identified as a standalone car company anymore.
The better description of Tesla is that they are a hardware + software + car + battery + charger + car dealership + retail company.
This description of Tesla spills into pre-orders for the Model 3 as it shows the anticipation of what the masses want.
GM (NYSE:GM) has downplayed the pre-order phenomenon by saying that they don't need pre-orders to build their cars, but the purpose of a pre-order is also to gauge interest and demand.
We haven't taken any. We don't need to begin building our products. We're really excited to offer it when it goes into retail production at the end of this year to those that have expressed interest and we'll work through our great network of dealerships to get them to customers. - GM
I haven't seen this kind of hype and anticipation for a product since the iPhone. However, Apple (NASDAQ:AAPL) never received $276m from any pre-order.
Although the balance sheet increased by a cool $276m, Tesla's market cap went up 15%, or around 4.7B, and sits at 36.25B today.
Another way of interpreting this is that the market expects Tesla to be able to sell 94,000 cars at $50,000 in the near future to justify the 4.7B surge in market cap.
The X Factor(s)
Using any conventional analysis on Tesla isn't going to work.
The other day, this is what Jeff Bezos wrote in his annual letter
Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of a 100 times payoff, you should take that bet every time... In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it's important to be bold. Big winners pay for so many experiments.
Jeff Bezos, Steve Jobs, Elon Musk. These people are the X factors. They are capable of turning 1 run into 1,000 runs and Tesla is paying for so many experiments and winning at them. Elon Musk is the 1,000 run generator.
Let's say that these CEOs should be valued at 10x the value of their peers.
Now also add into the equation the "visionary" factor. Amazon (NASDAQ:AMZN) isn't just an e-commerce business. Their AWS business is growing like a weed.
Likewise, the market isn't rewarding Tesla for its cars, but for its future and vision. It would be classified as "uncertainty" for others, but for Tesla, it's vision. Again, if it was any other company or any other CEO, Tesla should have tanked.
People love stories, big bold thinking and fully get behind visionaries. Give another 10x growth to Tesla for that. People will continue to believe.
So far, here are the additional variables that need to be considered to value Tesla.
- It's a play on 7 industries, not 1
- CEO X Factor
- Vision X Factor
Another Angle to Consider
Tesla isn't a car company. Real operations straddle a variety of industries, as it can't operate as a pure play car company.
Tesla is a:
- Computer on wheels tech company (Musk has said so himself)
- Car company
- "Gas station" (alternative energy supercharging network) company
- Car dealership company
- Retail company
As wild as it sounds, if you view the company in this way, the current price can make sense.
- Apple generated $24.5B of Mac sales in 2015. Apple is the comparison for the complicated computer + retail comparison.
- Chevron (NYSE:CVX) has about 8000 gas stations in the US. Tesla has 613 supercharger stations. Chevron is the comparison for the charging station.
- Guidance of 80-90k deliveries for 2016. Tesla is the leader in EV sales, so no GM comparisons needed here.
Maybe the current $36.25B market cap isn't so preposterous after all. Or is it?
Reverse Engineering What the Market Thinks
Now comes the fun part of trying to disassemble what the market is really pricing in for Tesla.
Analysts are expecting 8.6B in revenue for 2016 and 10.85B in 2017.
That represents a 4.2x sales and 3.3x sales for 2016 and 2017.
Are Market Earnings and Growth Expectations Realistic?
On the earnings side, analysts are looking at $1.27 for 2016 and $3.34 for 2017. That's a forward P/E of 208x for 2016 and 79x for 2017.
If you do a reverse valuation of the Graham Formula, you get an idea of what growth rates the market is pricing in.
In the 2016 "what if" scenario, the market is saying that with an expected EPS of $1.27, the current price of $265 justifies a growth rate of 194%.
Source: Old School Value
Using the 2017 EPS estimate, the current market price justifies a 69.3% growth rate.
Source: Old School Value
There are a couple of ways to interpret this. A P/E ratio is asking how much you are willing to invest to get back $1 of earnings. If you get in now and don't plan to hold for the long term, it means that you are willing to pay $208 now to get back $1.
Morningstar makes it easy to see this data by using a term called "Payback time" which looks at how many years it will take before you can get your money back.
You are looking at 11 years before Tesla gets to a level where you can finally play with the house money. Another interpretation is from Peter Lynch. In one of his books, he says that the P/E is loosely the growth rate you can expect. He goes on to say that he wants the growth rate to exceed the P/E ratio.
In this case, for 2016, a P/E of 208 means that Tesla needs to grow faster than 208% for it to be considered somewhat investable. Same thing with 2017. A P/E of 79 means it needs to grow faster than 79%.
However, the reverse valuations show that the expected growth rate is close but slightly below where it should be at.
Putting it All Together
In the beginning, I asked the question "is Tesla fueled by hype or the vision of the future?" It's a combination of both. Nobody will pay $208 for $1 or pay for something and be willing to be paid back 11 years later unless the idea is huge with a good chance of scoring "1,000 runs" as Bezos put it.
Then add in the Musk and visionary factor and that adds some buffer room. But are you willing to pay for between 79-208x of future (potential) earnings?
Are you willing to bank on Tesla sustaining or going beyond 69.3-194% growth? Are you sure that there will be no supplier hiccups that could delay production?
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.