Tesla Needs To Justify Valuation

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In their latest episode of the VALUE: After Hours Podcast, Brewster, Taylor, and Carlisle discuss Tesla Needs To Justify Valuation. Here’s an excerpt from the episode:

Tobias: Yeah, there’s a lot of dip buyers out there. Actually, there’s some sad threads on Tesla. When I go through and have a look at those– I’m going to forget which account keeps on grabbing them, but I think Mr. Skilling, one of the Skillings or Kenny Lee, I don’t know who it is. Somebody keeps on capturing– [crosstalk] One of them keeps on capturing all of the– there’s like a Tesla owners’ group and they’ve been conditioned to buy that dip repeatedly. And now, they’re starting to ask questions about whether you borrow money to buy some more dip.

Jake: Really?

Bill: No. The answer is no. Don’t do that.

Tobias: Yeah.

Bill: Sure, somebody’ll be like, “What do you know? You don’t know anything.” I know that it’s trading at under a 2% free cash flow yield and it’s a fucking car company. That’s what I know. Ugh.

Tobias: The problem is that when something runs up that much for that long and you conditioned to buy the dip repeatedly and you get rewarded for doing, you don’t know how to turn that behavior off when it goes the other way, and you keep on doing it, and you get destroyed. Make a lot of money on the way up and you give it all back on the way back down.

Bill: Yeah. Look, what he’s done is incredible and the financials to the extent that they’re not fraudulent are pretty impressive. But I don’t know. Man, you got to have a lot of good things happen from here.

Jake: Well, Toby, walk through that little math exercise you explained to me a couple days ago that you did on it.

Tobias: I just took the earnings and looked at what it needed to compound at, what it needed to grow at to justify the current valuation. It needed 30% a year for the next decade to justify the current valuation.

Jake: That gets you like a market rate of return, if that happens?

Tobias: That gets you a market rate of return. If it does 20% a year for the next decade, it’s 90% overvalued. I just looked at it and put in some rough assumptions what I thought would be a reasonable thing to do. It’s still being pretty optimistic and I get $30 to $60 in fair value for right now.

Jake: Per share.

Tobias: Per share.

Jake: Yeah.

Tobias: So, that might mean that I would want to buy it at no more than $20.

Jake: And today, it’s at–?

Tobias: $160, something like that.

Jake: Yeah.

Tobias: It needs to be– [crosstalk]

Jake: That 20% growth rate versus 30% growth rate is a bit of a cold water, isn’t it?

Tobias: Having said that though, it’s 50% year-on-year.

Jake: Yeah.

Tobias: If it keeps that kind of number, then– [crosstalk]

Jake: If only there were some base rates that could help us try to assess what are the chances of this.

Tobias: They seem to have been reasonably successful at hitting those numbers. Some of it is falling through the bottom line and it is generating free cash flow.

Bill: Look, if I were going to argue against the base rates, I’d say it’s already escaped base rates and they’ve done it without any advertising. There’s something special going on there. It’s just eventually– [crosstalk]

Tobias: Do use CAPE base rates– [crosstalk]

Bill: They’d have to own the entire car market to justify some of these numbers. Look, you know what, I like Samson. Samson is a loyal listener from day one. I hope Samson makes a ton of money on this thing. But it’s not something I’m going to make money on.

Jake: I agree.

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