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Nicholas Anderson
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Nick is a former marine, current finance student and independent trader, who is 100% self taught. Nick has particular interest in the offshore drilling industry and prefers to trade in the offshore drilling industry. Nick blends conventional methods of analysis with unconventional methods of his... More
  • Valuation Of Tesla Is Not Rocket Science 2 comments
    Jul 20, 2013 1:34 PM | about stocks: TSLA

    Tesla Motors (NASDAQ:TSLA) produces some of the finest luxury automobiles in the world. This is a fact because they have received the 2013 Motor Trend Magazine car of the year award. Tesla blends industry leading luxury with industry leading innovation. Those two facts are indisputable. Investors and analysts without bias towards the company will not dispute either one. With that said why is valuation for Tesla such an issue? Most of the disagreement in regards to Tesla's value seems to be between investors. Bulls argue that Tesla is undervalued, even at current prices, because it has "something special". Essentially, what that means is they perceive Tesla to be undervalued because of human emotion. Bears argue that Tesla is overvalued. In their minds it can't be worth more than another luxury auto manufacture with similar sales and gross profit margins. Basically, the bear argument is that Tesla is overvalued because of human emotion.


    First of all, it should be clear by now that Tesla Motors manufactures automobiles. It manufactures tangible products and cannot be compared to websites like Netflix (NASDAQ:NFLX) or Priceline (NASDAQ:PCLN) due to the simple fact it is not a website. Wishing for Tesla to be a website and trade like a website ( trade at 200 times foreword earnings) will not make it so. Instead it is comparable to a company like BMW (BMW.BE) or Daimler AG (DAI) (Mercedez-Benz). Tesla, BMW and Daimler earn profit from the sale of automobiles, which means the stock price is relevant to revenue minus operating expenses, otherwise known as net income. Exemption from this rule is not granted simply because everyone loves the product or the CEO. As of today, Tesla is not profitable without the sale of zero emission vehicle credits (ZEV). I seriously doubt if there is a professional analyst, fund manager, or even experienced investor that doubts Tesla will report a loss in Q2 13. With that said I seriously doubt there is any investment professional who would doubt Tesla become profitable in the future, but to follow the "Tesla's worth $120.00 now and they don't even earn a profit… imagine how much they'll be worth when they are profitable" logic is emotional and its erroneous.

    The Analysts Behind the Estimates

    Diligent investors know that the low price target for Tesla is 39 dollars per share. That estimated price target was estimated by a team from Bank of America (NYSE:BAC), led by John Murphy. Who is this man and does his estimate carry any weight? John Murphy has over 40 years experience. He is widely considered the father of inter-market technical analysis. He has authored numberous books including: "Technical Analysis of the Futures Markets" and his book "Intermarket Analysis: Profiting from Global Market Relationships" is the basis for the Market Technicians Association Chartered Market Technician Level 3 exam. If John Murphy warns investors to "be skeptical" then investors should "be skeptical."

    The high price target of 200 dollars per share was performed by Andrea James of Dougherty & Co. From 2006 to 2009 Andrea worked as a Financial Journalist. Her work was published in the Washington Post, Houston Chronicle, San Francisco Chronicle and Washington Business Journal. At present Andrea is the Sr. Research Analyst at Dougherty & Co. Her area of expertise is in aerospace and defense, clean tech, industrial and automotive. Andrea describes herself as a "journalist thrill seeker turned stock market analyst"

    What's the Point?

    Why wouldn't Tesla be "exempt from the rules?" The stock could be worth 200 dollars right? Wrong… although emotional investors can pay whatever they desire for Tesla they are not the ones who decide how much it's worth. Like I said before it's not rocket science so don't over think this. Money isn't managed based off a gut feeling or because there's something special about a particular company. Its managed based off how much a stock is actually worth. In other words its managed mathematically. Does Tesla earn enough money to mathematically be worth 120 dollars per share and how much are the institutional investors willing to pay for Tesla? No… and they've already told you. They're willing to pay between 39 and 90 dollars per share so that's what its worth. Since they own a majority of the shares they decide when to sell them. If a majority of the professional fund managers perceive Tesla to be overvalued it is overvalued and it sells off; their perception is reality. What anyone else thinks is irrelevant. To argue that an investment bank or hedge fund wouldn't perceive Tesla to be overvalued would be no different than to argue 1+2=12 or maybe even 21 because the numbers 1 and 2 have sentimental or extra value so adding them couldn't possibly equal 3. Money Tesla earns is not different from money BMW or Daimler AG earn. Since analyst opinion ranges from 39 dollars all the way up to 90 dollars then the 90 dollar estimates would include future sales of the model s and model x to account for rapid growth. While the 39 dollar estimate reflects what the company is mathematically valued at today. Be suspicious when you see one estimate so far off from the rest. They may be wrong or they may be a seller looking for buyers. At this point I am indifferent on Tesla. Although Tesla is obviously overvalued I have decided not to purchase puts on the company because they are obviously overvalued as well.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: TSLA
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  • Stephen Pace
    , contributor
    Comments (812) | Send Message
    Sorry, Nicholas, but Seeking Alpha was correct to reject this article. Essentially you are saying "a guy I like and has knowledge of the industry and a track record puts a valuation on this company so I believe him", while "someone I don't like and doesn't have as much experience in the industry puts a different validation on this company so I don't believe them." Industry experts are great, but they all have their own experience and point of view (and biases), and given that there has been no successful new car company in 50+ years, none of them have much experience in judging what a successful new startup in this area would look like, especially one that uses a complete different technology.


    I would have given more merit to your article if you had pulled out some quotes from John Murphy and Andrea James and suggested why their PoV was correct or incorrect. For instance, Mike Omotoso (an auto industry analyst) was quoted in the Houston Chronicle in January 2013 saying that Tesla would sell 7k cars this year. Having toured the factory and followed the Tesla forums for a few years, I knew this was incorrect. Why? I knew how many cars Tesla was producing, I knew a general number of outstanding reservations globally, I could see new cars arriving in my state weekly, and there was no scenario I could come up with that didn't have Tesla exceeding 20k cars in 2013. In fact, while Tesla officially increased guidance to 21k in 2013, I still didn't believe that number and think they will exceed it.


    If you look back in recent Tesla history, there were plenty of 'smart' industry analysts who were dead wrong every step of the way:


    1) Pure EVs will never work and no one will buy them.
    2) Tesla will never get the Roadster out the door.
    3) Okay, they did that, but it wasn't 'new'. Building the Model S from the ground up is new will take $1B USD and is hard. They will fail.
    4) Okay, they got it out the door, but it will suck, because all EVs suck.
    5) The batteries won't last.
    6) They take took long to charge, no one will wait that long.
    7) SuperChargers will reduce the life of the batteries.
    8) Building SuperChargers across the country will be too expensive.
    9) Tesla is doing nothing novel, GM or BMW could turn around and do what they do in a second if they wanted to.


    There are a lot more statements where these comes from and a lot of 'smart' analyst names I could name that said them. Given such a statement, though, you can decide for yourself if there is anything to it. SuperChargers are expensive? Let's add up how many Tesla say they need, how much they claim each station is to build ($150k non-solar, $300k solar) and run some back of the envelope numbers. Is that a big number given how much money they have in the bank? Further, are there any scenarios where Tesla doesn't have to pay the $150k and a site partner buys the boxes from Tesla and installs them 'free' to Tesla to gain traffic? Suddenly the 'experienced' analyst who says something bogus like that doesn't seem so smart. Their thinking is constrained to a world where they see a gas station on every corner and incorrectly think that Tesla has to match that to win. Tesla is playing chess while they are playing checkers.


    If you really think Tesla is worth $39/share, ask yourself how much revenue and profit Tesla could generate in 5 years time:


    Model S (30k+) all variants
    Model X (25k+) all variants
    Drivetrain (20k+)
    Gen III (100k+) all variants
    Battery Storage Sales (esp. solar via SolarCity, heavy industry, others)
    Energy Load Shifting ($$$ from utilities to provide megawatts on demand)


    And I can think of a few other businesses they may enter that are aligned to their core business. If you think they can't do these things at the margin they claim, and you think John Murphy is right at $39/share, then short. If you are right, you'll be rich! But if John Murphy turns out not to have read the tea leaves correctly, and Tesla reaches some of these goals, John Murphy can say "oops, my bad" and you'll be broke.


    The last point I'll make is that building new things is hard, so most people that say 'it can't be done' are usually right. But occasionally it happens and that is when you get 5X return for those that had the foresight to see it.
    28 Jul 2013, 03:34 PM Reply Like
  • Nicholas Anderson
    , contributor
    Comments (238) | Send Message
    Author’s reply » Im not even sure you read any of that? I said they make some of the finest cars in the world did you read that? what im saying is Tesla couldn't possibly be worth more than Damiler or BMW if they make the same amount of money and sell the same amount of cars. Teslas cars are cooler but the money they make is no different. it must be worth somewhere between 39-90 bucks... ok lets say 39 and 100 bucks...The reason its overvalued is because of human emotion.
    29 Jul 2013, 04:46 AM Reply Like
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