Latepost Tesla: A Follow Up

My post service on Tesla must receive got touched or so nerves because I got to a greater extent than than my green part of backlash from Tesla bulls. While or so of it was merely vitriol, many contained interesting counter arguments to mine. I idea it  would last useful to play devil’s advocate in addition to acquaint the representative for beingness bullish on Tesla. I receive got to state you lot that I was non able to convince myself but I may convince you.

Before I brand the representative for Tesla bulls, I would similar to last clear on 2 points. First, I receive got no economical or emotional stake inward the outcome of the valuation. I don't receive got a brusk seat on the stock, in addition to don’t project design to, in addition to I receive got never owned Tesla in addition to don’t regret missing out on the run-up either. Second, yet the hyperbole that has prefaced or so of the press descriptions of my post, I don’t consider myself a valuation guru, skillful or prognosticator.  If you lot are bullish on Tesla, I don’t watch you lot equally a sucker or a dunce in addition to I tin think of at to the lowest degree iii justifications for your bullishness. 

A. Tesla has feasible paths to higher value: In presenting my approximate of value for Tesla, I idea I was fairly explicit that it was “my” valuation in addition to non “the” valuation of Tesla. One ground I posted my spreadsheet in addition to left it open, for you lot the change, is because I sympathize that at that topographic point are in addition to ever volition last differences of thought on the hereafter of a company, particularly ane equally explosive equally Tesla. As I encounter it at that topographic point are iii possible paths to a value higher than the electrical flow price. 

1. The disruptor: It is possible that Tesla is ane of those rare companies that disrupts an entire concern in addition to changes the Definition of what comprises success. Just equally Amazon upended the retail concern in addition to Apple the smart telephone concern inward the terminal decade, it is possible that Tesla volition create a novel image for a successful automobile company: a fellowship that generates Ford-like revenues alongside Porsche-like margins. (My valuation for Tesla, the disruptor)
2. The might train/battery master: I may receive got misclassified Tesla equally an automobile fellowship in addition to that it’s existent innovations are inward the might develop in addition to battery technology that volition brand electrical cars viable. Ted Lim, ane of the commenters on my Tesla post service brings a peachy bargain to a greater extent than cognition than I practise to this possibility in addition to he points out the potential for Tesla to dice the supplier  to other automakers making electrical cars. The potential marketplace seat for batteries in addition to other original equipment may last smaller than for cars but the margins may last better. (My valuation for Tesla, the OEM company)
3. The "first mover": If Tesla is to a greater extent than technology than automobile company, at that topographic point is the possibility that if it tin found itself equally the leader inward the business, at that topographic point may last a tipping point, where size feeds itself. In practical terms, you lot are arguing that if Tesla charging in addition to service stations are to a greater extent than extensive than the competitors, buyers of electrical cars volition last to a greater extent than probable to purchase Teslas, thus making it the "electric car" company. (My valuation for Tesla, the network winner).

While I watch these paths equally narrow in addition to hard to sustain, I tin encounter why others receive got a unlike indicate of view. There is ane annotation of caution I would add together nigh profitability. Some of you lot receive got pointed out that Tesla already has a 25% turn a profit margin in addition to that my supposition that it volition generate a pre-tax margin of 12.5% is thence agency also pessimistic. There are 2 reasons to non larn carried away alongside the electrical flow margin. The root is that margin that Tesla is reporting is a gross turn a profit margin, which is significantly higher than an operating margin or a internet margin; at that topographic point is many a cost betwixt the gross in addition to the net. The 2nd is that having a high gross margin, when you lot are selling relatively few cars at a high toll is easier to practise than maintaining that margin equally you lot scale up. 

2. Tesla is a pricing game, non a value proposition: When stocks are upwards 4 flexure or 5 fold, equally Tesla has over the terminal year, they attract a unlike flat of investors in addition to what happens to the stock toll may last to a greater extent than a reflection of what I telephone telephone the pricing game, rather than underlying value. In 2 before posts, ane after the Facebook IPO in addition to one early on this twelvemonth on Apple, in addition to argued that the pricing game is characterized yesteryear 2 features. The root is the ebb in addition to catamenia of momentum volition travail prices to displace alongside investor mood shifts; scream back how speedily the momentum game shifted against Apple inward September 2012. The 2nd is the supremacy of “incremental information”, where modest pieces of news, that receive got piffling final result on long term value, receive got an outsized final result on price. Thus, the story that Elon Musk (who has been masterful at directing the toll game to Tesla’s benefit) volition last driving across the province inward a Tesla due south (to demo that the machine has the arrive at to practise so) volition larn tidings coverage in addition to may send on the stock price. While I am a believer inward long term investing based on value, I receive got a peachy bargain of abide by for the pricing game in addition to recognize the dangers of getting inward the agency of momentum, at to the lowest degree inward the close term. I also know that at that topographic point are others who are far improve than I at playing this game in addition to don’t begrudge them their profits. Thus, if you lot receive got been playing this game alongside Tesla for the terminal year, you lot non solely receive got the profits to demo for it but also my respect. 

3. There may last a “strategic” buyer for Tesla: This may last cynical of me, but I think of strategic buyers equally buyers who root create upwards one's demand heed that they absolutely receive got to purchase a fellowship in addition to and then come upwards up alongside a toll to brand that a reality. Since the determination to purchase is made before the toll is set, it should come upwards equally no surprise that strategic buyers tend to pay also much. In the context of Tesla, it is obvious that every large automobile fellowship wants to last the winner inward the "electric car" race in addition to volition invest large amounts to succeed. While Toyota, Daimler in addition to Ford may all last trying to practise this internally, at the moment, history also tells us that patience is non a strong arrange inward most corporate boardrooms in addition to that ane of these companies volition belike experience the urge to displace faster in addition to pass more. At a marketplace seat cap of $20 billion, Tesla may look to last also large a target but equally I noted inward a series of posts terminal year, goodness feel seems to dice out of the window inward the acquisition process, in addition to to a greater extent than so alongside large acquisitions than modest ones. If Tesla is acquired, you lot tin residual assured that Mr. Musk volition extract a pregnant premium over the marketplace seat price, fifty-fifty if that toll itself is substantially higher than value, in addition to that the acquiring fellowship (and its bankers) volition come upwards up alongside prissy buzzwords (control, synergy) to explicate it away. 

I promise this post service does non come upwards through equally defensive. I stand upwards behind my judgment of value for Tesla inward the my terminal post, but all I would receive got out of that valuation is that I would non purchase Tesla at today’s price. Given my fearfulness of getting whipsawed inward the momentum game, I would non sell brusk either. It was non meant to last investment advice.  I am a trace of piece of occupation solid believer that investors receive got to receive got responsibleness for their ain choices in addition to I volition abide by yours. Thus, if you lot are a long-term investor inward Tesla, because you lot believe that at that topographic point are feasible pathways to a value higher than the price, I sympathize your motives. If you lot are a trader who is playing the pricing game alongside the stock, I tin state you lot that I wishing I could play that game equally good equally you lot do, but I stink at it. So, I won't fifty-fifty try. In closing, though, if you lot are a Tesla bull in addition to you lot experience threatened yesteryear a weblog post service from me, I think you lot may last a lot less secure inward your bullishness than you lot think. 

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