Even if Tesla provides insane value in ten years, to get in line with traditional/historical manufacturing company valuations while justifying their current valuation, that would necessitate something like $70 billion in free cash flow per year.
So in other words, if Tesla does everything right, executes perfectly on a global scale, suffers no major hiccups, and they grow their annual free cash flow by tens of thousands of percent from their current position, they'll finally justify their valuation and your ten year return from a current investment in Tesla will be 0%, not adjusted for inflation.
The bull case from here is thinking that Tesla's valuation will permanently stay in the upper atmosphere for decades to come, but at some point, the growth rates slow. There are only so many automobile purchasers on our planet, not to mention the competition which is picking up. My bet is that Tesla does not get to $70B in FCF by 2030. I also don't think the market will give them a 30x sales valuation forever, especially as their growth rates eventually begin to slow. They've already saturated Europe and are heavy into the Chinese market, and of course, their US + Canada market penetration goes without saying.
Maybe Tesla goes back to a normal valuation via a $3T market cap, giving current holders a great return (so long as they cash out at the peak). Who knows. But long term, I don't see how they justify their present $1T market cap, and as Ben Graham famously (and rightly) quipped, in the short term, the market is a voting machine. In the long term, it's a weighing machine. EVs are "in" right now, and they're getting lots of votes, but in ten years, EV manufacturing will be as boring as ICE car manufacturing is today and the industry's valuations will be weighed on its own merits.
And they are in the Chinese market only till Xi/CCP decide is in their interest, as in acquire IP. The day it’s done, Tesla would be thrown out of China.
- Last year Tesla got in a huge PR storm when a customer complained of unintended acceleration. It later turned out the customer was making it up. However the government didn’t intervene and let the situation got a lot worse, whereas they routinely “stop the spread of misinformation” on other hot topics.
- Many government and academic institutions banned Tesla from their campus, citing security concern from their cameras
Also in general anti-American sentiment is extremely high in China right now, making it harder for Tesla to do business
By traditional, I mean the methods people have used to appraise companies for hundreds of years. i.e., I'm predicting that given enough time, Tesla will revert to the mean, because literally every other publicly traded company that's ever existed has done this. Sure, maybe Tesla will be the first company since the 1600s to avoid this. After all, the only modeling data anyone doing anything has is historical data.
But that's a hell of a gamble to make if you're a Tesla shareholder.
That's one of those classic disingenuous gotcha comments.
The fact that there's a pretty common way to value public companies doesn't mean that you can make a fortune with it, because it sweeps aside the importance of time.
Have you never heard of Keynes' classic "The markets can remain irrational longer than you can remain solvent" ?
It’s not irrational to value a company based on the people working on it or what you think the potential of the product is, rather than just what their financials are doing right now.
That’s what investors do everywhere - why do you think we have analysts looking at product plans and things?
"Eventually return to the mean, given a long enough time frame" means that you should invest in index funds, which I do. It's not a ticker prediction algorithm that one can game or rinse/repeat for massive short term profits.
The bull case from here is thinking that Tesla's valuation will permanently stay in the upper atmosphere for decades to come, but at some point, the growth rates slow.
The valuation may eventually adjust downward.
But there was a very pivotal event not too long ago: Tesla was added to the S&P 500 index. It is, in fact, the 8th largest company in that index.
Which means: Game Over. Elon Musk won. Big.
The vast majority of US equity investment is now either passively indexed to the S&P 500 or managed by institutions that are judged by their performance relative to that benchmark.
This is a huge, ongoing flood of dollars that flows on a daily basis into each and every S&P 500 stock. That money provides ongoing support to the Tesla stock price.
There are plenty of S&P 500 companies with very low valuations. I'm not saying Tesla is going belly up, or that they're a fraud, or that their product is stupid.
Only that a manufacturing company trading at 30x sales in a CapEx heavy cutthroat industry is historically impossible to sustain for decades.
