Is it possible to value a company like Tesla and should we even try?

Core Fund Monthly Update

Tesla is one of those love-hate companies where neutral opinions are hard to come by. It is clouded with uncertainty, politics, and an ever controversial leader but it is also a symbol of a better tomorrow, innovation and massive potential. 

Similarly to Mr Musk himself, valuating growth stocks is just as fiercely debated a topic. Yes, you can use models like discounted cash flow (DCF) to determine whether a stock might be overvalued or undervalued. You might even be fairly accurate if you are looking at a 3-year period. But if you are a true long-term investor and looking at a period of 5, 10 or maybe even 20 years, the task of predicting future cash flows and choosing the correct discount rate becomes near impossible. That is why long-term investors have been handsomely rewarded if they had the vision to invest in companies with massive future earnings growth and had the conviction to hold during the good and the bad times. The truly great growth investors are the ones that can identify inflection points in companies before they happen. 

So, pick a high-growth stock and hold it for 10 years? Not so fast, what you think might be the next Tesla, Amazon or Google might actually be the next Kodak, Blockbuster or Yahoo. Going all in on a stock is never a good idea. 

Unfortunately, there are no shortcuts in investing as in life and if you chase get-rich-quick schemes you will most probably get broke real quick. The ability to identify these inflection points and make informed investment decisions requires a deep understanding of the company, its industry, and the broader market. And even after identifying such a company an investor requires the ability to manage their emotions. The noise and constant fluctuations in the market can be overwhelming and the gamification of trading platforms can lead to a gambling addiction for investors and traders. We, as humans, are emotionally designed to fail in this environment.

Despite these challenges, there is a strategy that has withstand the test of time and has proven to be effective for many successful investors. This strategy is to find and invest in great businesses, sell the bad or deteriorating businesses, focus on business fundamentals, and avoid overpaying for assets. This principle is echoed by renowned investors such as Warren Buffet, Peter Lynch, and Stanley Druckenmiller.

With the flood of new day traders it might seem like long-term investing is a lost art. We disagree, new investors will come, some will fail, but those who make good decisions over the long term will survive and eventually accomplish their financial goals. Remember the stock market is a mechanism to transfer wealth from the impatient to the patient, and those who respect risk and understand it, will be able to navigate through the market and come out successful.

Back to Tesla

Tesla, the electric vehicle (EV) company right? If Tesla was only an EV company predicting their future earnings per share (EPS) and creating a DCF model might have been a lot easier. 

After some research, you will be able to predict how much of the automotive market they should capture by 2026 with some accuracy. You can estimate how much revenue they will make by multiplying the number of vehicles they should sell and their average selling price while accounting for inflation. Next, you look at their operating margins and determine how much profit they should generate. You choose your discount rate based on the risk involved and your required rate of return. After looking at its closest competitors and estimated future growth you can calculate a reasonable multiple the company should attract. Finally, you throw all of these numbers into a fancy excel spreadsheet and with some black box magic you know exactly what Tesla is worth today.

Chances are that by 2026, Tesla won't be an EV only company, like today Amazon is way more than an e-commerce company, Apple is more than a phone company and Microsoft is more than an operating system. 

Tesla is already more than just an EV company and they are positioning themselves as a technology company in several key industry trends like: 

Energy Solutions: Tesla offers energy storage systems and solar panels for homes, businesses, and utility companies.

Redefining Transport: Tesla has developed advanced autonomous driving technology, including Full Self-Driving (FSD). This is currently in beta testing and as you can guess it is a highly controversial topic. Therefore, it is very difficult to determine if this is going to revolutionise the way we commute or a very expensive experiment that never reaches real world applicability. Tesla is also working on electric semi-trucks and the robotaxis as part of Tesla's larger vision for a future in which electric and autonomous vehicles play a major role in transportation. However, these plans will require significant investment, technological advances, and regulatory approval, and it remains to be seen if they will come to fruition in the way that Tesla envisions.

Robotics and AI: Tesla is actively developing AI and robotics technologies for use in its factories and vehicles. Last year Tesla unveiled a prototype of its humanoid robot, dubbed Optimus, launching a bet on artificial intelligence that aims to reshape the future of physical work.

So we ask again, how do you value a company like this? How can you possibly create accurate estimates for 2030? We rather rely on our scorecards to determine whether this company is an attractive investment for us. We scored Tesla earlier in 2022 and we believe it is still fairly accurate. The scorecard is attached as an image.

Luckily, most bear arguments are centred around nothing else but Tesla's valuation and if the history of big tech has taught us anything, it is that an expensive stock can continue to surge higher, as long as they continue to grow earnings power. We agree that it was overvalued but like most growth stocks it endured a massive correction during 2022. We feel it is more fairly valued at the moment, whatever that may mean. 

Tesla certainly has the potential to turn into a Super Conglomerate and if the stars align this stock will create massive wealth for its shareholder or maybe it is the next Kodak, we leave you with that nerve-wracking thought.  

Portfolio Update Summary

Our portfolio is green again, thanks to the bull run we have had thus far in January. Although this rally might get faded again, we can rest assured that when the BULL returns, we are invested in high-quality, growing companies. We are not adding to any stocks in our portfolio, we currently sit at about 12% cash and would like some purchasing power if this turns out to be another bear market rally.

Disclosure

This article is not financial advice and is based on the opinion of the author.  This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products. The $20K in the Core Fund is not real money and only a demonstration of a typical portfolio. This is an actively managed portfolio, where we will buy and sell positions as we deem fit without any regard for taxation. Remember, all selling of stocks triggers a tax event in most countries and it is the investor's personal responsibility to always remain tax compliant.