Let me start by saying, I love Tesla cars. They certainly aren’t perfect, the fit and finish isn’t great, but we’ve put more than 50,000 miles on our Model 3 in under two and half years. We’ve had a 12-volt battery die on us out in Utah and we’ve had to replace the tires a few times. Other than that, it has been an incredible car. Getting groceries during rush hour traffic isn’t so bad anymore. Just let the Tesla navigate the bumper to bumper traffic while you listing to your favorite company’s third quarter earnings call.
So I get it. I get the unbridled enthusiasm. However, that’s what is driving the stock price. At a market cap of one trillion dollars, investors are all but assured that Tesla is going to make $100B a year in the not too distant future. Currently, Tesla makes $3.4B per year. That means Tesla needs to make 29.4x their current cash flow, and fast! That’s more than 2x their current revenue.
Does Tesla have that ability? Maybe! But those betting on self driving taxis don’t have the same FSD beta that I do. Tesla’s full self driving technology is amazing, and stunning, and terrifying. I have taken a 100+ mile road trip without making a single correction. However, just yesterday there was a little construction, so the full self driving software decided at the last second to dart left and drive into oncoming traffic instead of go right into the bike lane as designed.
In car subscriptions. Licensing FSD software. More models. Battery supplier. First order principals development. There are a lot of reasons to be optimistic about Tesla as a company, and I am! We will soon be a two Tesla family, if they ever quit pushing our Model Y delivery date back.
What’s Tesla really worth today? Well, what it’s worth today at a P/E of 50 is about $170/share, even though it is trading at $1037 as I write this. That’s a 600% premium.
If you can’t tell, I think the market is irrational here. Tesla needs to make $100B/yr someday to justify this price. When it makes $101B/yr, then you start getting paid back as an investor. It certainly could happen, but if you want to double your money, you are betting Tesla will make $200B/yr someday. If it takes ten years, your rate of return would be only 7%. Or you are just hoping other people will pay for yet more future growth. Seems speculative to me.
My rule of thumb for growth companies is that I don’t want to pay for more than four years of sustained growth. With Tesla, I can’t see the company making $100B/yr in four years, so I’m out.