A week ago (January 30), I wrote a post on Tesla, where I valued the stock at $427 and said that I had sold my stock for $640. In the next two trading days, the stock zoomed to $900, and as is always the case with Tesla, I heard from both sides of the divide, with bulls accusing me of missing its true potential and bears arguing that I had gone over to the dark side. While I argued that this was just my value for Tesla, driving my decision, not the value driving others, I guess that did not come through, In this post, I am reframing the valuation in terms of four key levers: growth, profitability, investment efficiency and risk, and you can pick your own story for Tesla and I will value your story. So, good luck and let's get started.
一周前（1月30日），我就特斯拉写了一篇文章，对特斯拉给出了427美元的估值，并自陈以640美元的价格卖出。 在随后的两个交易日中，这支股票飙升至900美元，而多空双方都对我做出了抨击，多头指责我错过了这支股票真正的潜力，而空头则指责我倒向了黑暗面——在特斯拉话题上我的遭遇一贯如此。虽然我说过，这只是我自己对特斯拉的估值，驱动的也只是我个人的决定，而不该影响他人对特斯拉的投资，但我想人们并没有领会这一点。在这篇文章中，我将根据四个关键杠杆来塑造估值框架：增长、盈利能力、投资效率和风险，你可以从中为特斯拉挑选一个你自己的故事，而我会根据你的选择给出相应的估值。 那么，祝你好运，让我们开始吧。
(00:00) Welcome back.
It's been only a week since I valued Tesla last Thursday,
and I was hoping not to come back to the stock.
To be quite honest, I've lots of stuff to do, I need to do my data update post,
but in a sense, what's happened over the week almost forces me to come back to the stock.
You know, just very quickly reviewing, last Thursday, which was the 29th of January,
I posted that I sold Tesla for $640,
and I based it on a valuation I did where I valued the stock at around $430.
And just to show you how bad my timing is,
and I admitted to it, I'm not good at timing these things - momentum game,
the stock took off, in fact. How much?
in the two days after I sold, the stock went up to $900.
And of course I heard from people,
I heard from people saying "we're sorry you sold the stock",
and of course there're people who took issue with my valuation on both sides.
People who thought I'd been too pessimistic and that the value should really be $800, $900, $1000, $1500
and use the rugged (?) price rise to say "hey I told you so".
And there were people who said, "hey you've gone over to the dark side,"
"this stock is worth nothing and that $430 is way too optimistic",
especially given that I'd valued the stock at $190.
Now I don't know whether I'd conveyed this,
but that value of the company, it is MY valuation, it is not THE valuation.
I'm not saying I know the story, I don't have a crystal ball, I don't know what's going to happen.
And I said, "you know what, I could be wrong", your story could be different, your value could be different,
I don't think people got that abstraction, because they continue to contest,
"assumptions must have warranty revenues, higher margins, lower..." etc.
So what I thought I'd do today is actually create a do-it-yourself valuation of Tesla,
in other words, rather than me tell my story about Tesla, which I've already done,
why don't you tell your own story, because in a sense this is a company where we all have strong views.
(01:55) So let me show you the valuation I had, you know, week ago,
and then we can use it as a launching pad.
I basically built a pretty successful automobile company.
I started with revenues of about 125 billion.
I gave the margins of 12%, significantly higher than a typical automobile company.
I actually let them reinvest very little for the next five years because of excess capacity,
and I gave them the cost of capital of an automobile company.
I put in a 10% chance that they could fail
because they're still barely making money and have a lot of debt.
So that's a $430 value.
And when you look at this, especially if you are not from -
if you find numbers - you know
you either find it off-putting because you don't like DCF,
you don't like this many numbers in a page - I get it.
(02:42) So here's what I'm going to do:
I'm going to take my story and break it up into the four levers that drive that value.
So there are a lot of numbers in that page but there are four levers that drive the value.
The first is the growth lever, the growth lever is controlled by what kind of revenue growth rate I use,
in my story, I used the growth rate that allowed me to have $125 billion in revenues in 2030,
that's five times larger than the revenues today.
The second lever is the profitability lever, which is as the company grows, what kind of margin should I expect to see,
and I gave Tesla 12% margins again by 2025,
so the margin improvement happens pretty quickly.
The third lever is - to grow you got to reinvest,
so the third lever is the investment efficiency lever,
how much will they need to reinvest to get to that lever,
and I was again optimistic, I assumed that at least for the next five years,
given that they have some excess capacity built-in already,
that they can get away by investing - for every dollar they invest, three dollars in revenues.
And the fourth lever is the risk lever, and there are two inputs I use.
One is the cost of capital where I gave Tesla 6.9% - about 7% cost of capital,
and likelihood of failure that the company will not make it as a going concern
and as I said, it's a 10% chance.
Those are the four levers, and that's what gave me my story in my value.
(03:58) So here's what I'm going to do.
I'm going to take each of these levers -
I would like to give you some background information,
you might already know this stuff, in which case you can skip the background information,
and you can then pick what you think is right for Tesla.
So let's start with revenues.
To get a sense of how much Tesla can sell in 10 years,
let's take a look at the auto business.
Even though you might have stories about software and sales of services,
fundamentally Tesla will get a significant portion of its revenues on automobiles.
How big is that market? And here you have some good news:
If you look at the total market, it's about 2.5 trillion dollars, it is a big market.
The mild piece of bad news here: It's not growing that fast.
In fact, over the last decade, with everything - put in hybrids, electric cars -
the growth rate has been about 3.5%, and it's actually, you know, it's actually slowed down in the last five years.
It's a big but slow-growing market.
Now to get a sense of what a big automobile company looks like,
well let's take a look at the twenty largest, all right?
So if you look at the very top of the list, you have Volkswagen and Toyota, which have almost 300 billion in revenues.
Towards the top of the list you have Daimler, at about 200 billion.
You go down a little bit further down the list, you have BMW at about 100 billion.
And then you keep going further, at the bottom of the list, you have Tesla at 25 billion.
If you remember the story I told you in my original valuation, it was 125 billion,
I made them bigger than BMW, but could I make them bigger?
Sure, I could have given them Daimler-like revenues, or even Volkswagen-like revenues,
and for Volkswagen-like revenues, you get about 10 percent of the total market.
So you have some perspective on what would revenues look like.
(05:38) Now of course, the other story about Tesla is it's really not an automobile company,
it's a tech company that happens to be an automobile company.
Okay, so to get a sense of what a big tech company would look like,
I looked at the very top of the heap, you know, I look at the FAANG stocks,
Facebook, Alphabet, you know, Amazon, Netflix, Google, and Apple, and I include Microsoft for good measure,
and you can see already that the revenues of these companies,
even though their market caps are much much much bigger than Volkswagen and Toyota,
their revenues are actually not as high.
One of the things you notice about tech companies is they don't get the kinds of revenues that automobile companies do,
because they don't sell a unit for, you know,
and Apple iPhone, even though it's expensive, it's not $50,000 or $80,000,
but here's what they deliver in measures you don't see at automobile companies: they're incredibly profitable.
Now, Amazon doesn't look profitable, but part of that is an illusion,
because the shipping cost that they accumulate for Amazon Prime,
if you add that back, their margins are about 50%.
In fact, collectively, if you look at the FAANG plus Microsoft's, you get about 20%.
Incidentally the company that is closest to a software company here is Microsoft,
the most, perhaps the second largest market cap company in the world, but its revenue is only 130 billion.
So keep that in mind, auto companies might not be as valuable, but they have big revenues,
but their margins are not as good as the tech companies.
(07:07) So here's my first question I have for you:
whatever you story is for Tesla, it's an auto company,
it's an auto plus software company, an auto plus software plus or you know, ride-sharing company,
you put in whatever story you want and pick an end game.
Don't worry about growth rates,
think about what the revenues will look like in ten years if they succeed.
It could be 65 billion, will be Renault-like;
100 billion, BMW-like;
150 billion, which would make them close to Ford and Honda;
200 billion, Daimler;
300 billion, Toyota and Volkswagen;
or maybe you have a story you want to tell that's different,
you could make it 500 billion if you want, if you set the growth rate to 50% or 60%.
(07:47) Now let's move to the second lever, the profitability lever.
Again, let's start with the business that actually are (?), the automobile business, and the news doesn't look good here.
Automobile companies have terrible profit margins, the median margins are 3% - 4%, no matter where you look in the globe
and there are lots of companies that lose money.
It is true that the Toyotas and the Volkswagens might make money,
but collectively this is a business that is not profitable.
Well, the news is much better when you move to the tech companies,
tech companies have a median operating margin of 10.25%, and I'm including both software and hardware.
It's even better if you look at the FAANG stocks, the most successful tech companies.
Their aggregate operating margin - I added up the operating income for all of the FAANG stocks plus Microsoft,
and added up the revenues, and I get about 20% - 19.87%.
再把它们的营收加总到一起去算，就会得到高达20% (19.87%) 的总和经营利润率
And if you focus just on software companies, the margins are even higher.
Now you are saying, "why are margins so much higher in tech"
and even the most successful pure automobile in history could never deliver margins like this,
and here's a reason.
You are a software company and somebody orders an extra unit,
let's say you are Microsoft and somebody want it right now.
Remember you're ordering it online, there's no cost associated with the extra units, almost all profit.
The cost of goods sold on the marginal unit is very low, that's what makes the margins high.
In contrast, for automobile company, even the most efficient ones, the cost of making a car is never going to be 5% or 10%.
You'd think, "what about a company like Apple, that sells the iPhone?"
You know that iPhone sells for about $1000, but the cost to make the iPhone is only $400, it's only 40% of revenues.
There's a reason why margins are so much higher in this business.
So you ready? You can choose a margin.
You can go with the median for the auto industry, think "that's what they are";
you can give them some technology median, maybe it's a software company;
I don't know, that'll be really tough to make it all software, maybe they'll approach the FAANG Aggregate;
or maybe you believe there'll be some kind of a blended company, where the margins are going to fall somewhere between auto and technology,
that's basically what I assume with my 12%, because it can't be just purely an auto company.
(10:09) Now let's talk about investment efficiency, again let's look at the auto business.
The way I'm gonna measure investment efficiency is how many dollars of revenues you'd get for every dollar of capital you invest
Again, looking at the automobile business, you can see that you have to invest a lot to grow,
because these assembly plants cost a lot, so you can see the median number for that is about $1.37.
A really, really efficient auto company can generates about $2.4 in revenues for every dollar of capital invested.
Now what does it look like for tech companies?
Well, the tech companies don't look much better, it's basically -
if you look at tech companies, tech companies are not that efficient, partly because their revenues are not huge.
Now, my estimate of three dollars in revenues, it's not just higher than the most efficient automobile company,
it's much higher than the averages in the tech business, for FAANG stocks.
And it's aspirational,
because right now Tesla is not delivering three dollars in revenues for every dollar of capital,
it's delivering about 1.32 dollar.
So you ready?
you gotta pick, measure investment efficiency by using the sales to capital.
Remember, the way we use this is the lower the number, the less efficient you are,
the more you have to spend to get the same growth rate
the higher the number, the more efficient.
So I'm giving you a range of choices,
auto industry first quartile, the median, the third quartile,
technology, software, the FAANG stocks which don't look that great in terms of efficiency
and of course, you could then override all of these and create a special company,
a company that you think has never been seen before.
(11:43) Finally let's talk about the cost of capital.
Cost of capital - people have a very difficult time getting perspective,
you ask people what a typical cost of capital is, you get numbers that actually are not even close to reality.
So what I do is I do a histogram of cost of capital for all companies globally, 43,000 companies,
and here's the distribution:
in the median cost of capital for a global company in dollar terms, at the start of 2020 was 7.58%.
In fact, look at that distribution, look at 80% of companies have cost of capital that fall between 6% and 11%.
I mean this is not a huge range,
what I'm trying to say is if you are valuing Tesla and giving it a 20% cost of capital,
that's way out of the distribution, so this table is just to get perspective.
And if you look at the cost of capital for the different businesses, automobile cost of capital is only 6.94%.
Tech company's cost of capital is much higher, it's riskier.
All companies globally, the median cost of capital is 7.58%, the first quartile is 6.27%,
a higher cost of capital will be 8.71%,
or you can directly put a cost of capital that you think is right.
As for the likelihood of failure, maybe you believe that, you know, Elon Musk
when he says the company has turned the corner,
the earnings are going to be positive, we're gonna be cashflow positive,
in which case they're not gonna default,
or you can say, "look we're going to bounce back and forth"
even if you're an optimist,
you have a lot of debt, you have convertible debt,
and the stock price drops, those dangers are going to come back,
and attached a 10%;
if you are a money loser and you're worried about prices really dropping,
you might make it even higher, 20%;
or if you really believe revenue growth is going to drop off, then Tesla is going to be in big trouble,
because they need growth to bail them out, the probability could be 50%.
So make a choice on both of those variables.
(13:31) So assuming you made those choices
and obviously couldn't have made them while you were listening to me, that was too fast,
maybe you want to pause this presentation, go make those choices and come back,
the values you gonna get are going to reflect your choices.
So I'm not saying one is right, one is wrong,
but the first three scenarios are pure auto scenarios,
one is you give Tesla BMW-like revenues,
you give it the margins and investment efficiency of a very good automobile company in 75th percentile,
and the cost of capital of an auto company,
the value per share you get is $106 per share.
For a stock traded at $700, you're in big trouble.
Even if you give them 200 or 300 billion in revenues,
the value per share rises only to $330.
If you think of Tesla as an auto company front and center,
then you're gonna find Tesla to be overvalued.
This is why when you see these comparisons of Tesla to Ford and GM, it's a waste of time.
Of course you will not buy Tesla if that's your comparison.
(14:32) Of course you might take a different perspective that Tesla is an auto company with a tech twist,
and then the next three scenarios, what I did - I've given them auto company revenues,
you need that because you need the big revenues,
but I've given them tech company margins and tech company investment efficiency.
I also have to give them a tech company cost of capital.
And if I do that the value actually doesn't budge that much.
In fact, I get higher margins but it's overwhelmed by the higher risk,
my values ranges from $110 to $300 per share, that's not gonna do it.
(15:04) There's a third group of scenarios, what if you think Tesla is going to be the next great stock.
Well let's make them look like the FAANG stocks,
basically I give them auto company revenues again,
because remember the FAANG stocks don't have huge revenues,
but I give them FAANG stocks' margins and FAANG stocks' investment efficiency,
and I give them a tech company cost of capital.
Now we're starting to see the value move,
the value moves to $459, if you have BMW like revenues,
and the stock would be $1200 if they have revenues like Toyota.
(15:38) And finally, if you give them——and this is I think you pick and choose the best possible scenario.
Not just FAANG but you know, you pick your best scenario.
You have revenues like Toyota, margins - median - like a software company,
you are a revolutionary manufacturing company,
and your cost of capital is an auto cost of capital.
The value per share you get is $2105.
(16:03) At this stage you are saying, well, therefore whatever I do is okay, right?
Well, you know, the stories are giving you different values,
but they are stories, and not all of them are equally possible, plausible and probable.
Now, in fact, they are the three-part test I use:
is it possible, is it plausible, probable?
With each of these stories, there are questions you will need to answer,
and I can't answer them for you, because these are your stories.
With the big auto stories, the question is
whether Tesla could climb to the very top of the auto revenue ranks,
while having margins that are usually - which usually is reserved for mass-market auto companies, Volkswagen and Toyota,
while earning operating margins that are usually reserved for luxury auto companies. So can it combine that?
If your story is that it's a techy auto company, the key question becomes
whether you can get the bulk of your revenues from automobiles,
while behaving like a tech company in every other dimension.
Well if you think it's a FAANGy stock,
I don't even know if that's the right word to use,
the big question becomes
whether you should actually invest in a stock on the expectation that it's going to be the next great stock.
You'd think, "why not?"
Well then you've set yourself up for disappointment, right?
Because if it becomes the next great stock, you just got what was expected,
and if it doesn't, it's all downside.
And finally, what make your own, no - it's your Frankenstein company, right?
You picked the best of each input.
The question I am gonna ask is,
can you create a company that earns revenues like Toyota,
generates margins like Microsoft,
invests like no other manufacturing company in history,
and has the low cost of capital of an automobile company.
I'm not trying to prejudge this,
but I'm saying you have to ask the key questions about your own story.
(17:48) So finally, a couple of things I want to kind of talk about before we end this session.
One is, since I sold Tesla, I've been asked, "do you regret it?"
And you might not believe me, but I don't,
I bought Tesla in June of 2019 because I thought it was undervalued.
I sold Tesla because I thought it was overvalued.
I have to play the game I came to play.
If I abandoned the philosophy that I have,
it might not even work,
but it's my philosophy, it's all I have.
And if I abandon it because I want to play the momentum game, a game that I'm terrible at
Then even if I make a little more money on this, think of what I've lost,
I've lost my core beliefs, and I'm not willing to do that.
And the other thing is, whenever I write about Tesla, I duck for cover,
because, I mean, I get assaulted from every side,
I mean can we disagree without being disagreeable?
This is just an investment in a world
where we're divide on politics and religion and culture,
do we have to add investing to the mix?
I mean, I know if you are holding onto Tesla, and when I sold,
I mean, the fact that I sold doesn't make your profits go away,
I wish you the best, I hope you make a lot more money,
and I'm not going to begrudge you on that.
And if you sold short and you've lost money,
I have no joy out of your losses,
I'm not going to dance on your, you know, I'm not going to do some celebratory dance in it, a touchdown dance or something,
Well, how do I benefit from you losing money?
But, you know, I find there's so much inbuilt anger with the stock on both sides,
that's almost impossible to have a serious debate.
And finally, as far as I'm concerned, Tesla is a fascinating company,
I'm gonna keep coming back and value it.
I might buy it in the future, I might not buy it in the future, but here's what I can promise you:
it is not something I want to lose sleep and friends over.
Thank you very much for listening.