You can’t deny that Tesla Motors Inc (NASDAQ:TSLA) is an impressive company. Its cars are so popular that production can barely keep up, and CEO Elon Musk has established himself as an effective leader with strong vision. Whether the current stock price makes sense is another question entirely, but we’re no longer surprised when we hear the latest uber-bullish price target.
So when Ascendiant Capital Markets analyst Theodore O’Neill initiated coverage of Tesla Motors Inc (NASDAQ:TSLA) with a Buy rating and a $320 price target it was the number that surprised us (his PT is in line with Credit Suisse and Morgan Stanley), but what he used to get there: a 65-year dividend discount model.
Vanguard’s move into PE may change the landscape forever
Private equity has been growing in popularity in recent years as more and more big-name funds and institutional investors dive in. Now even indexing giant Vanguard is out to take a piece of the PE pie. During a panel at the Morningstar Investment Conference this year, Fran Kinniry of Vanguard, John Rekenthaler of Morningstar and Read More
Assuming Tesla still exists in 2080…
“We assume all the annual earnings are dividends, we grow them as shown in the model at the back of this report and then over the course of the next 10 years we scale the growth back until earnings growth matches GDP which rate we hold constant for 55 more years. We then discount those ‘dividends’ at 8%. This model probably understates the tax benefits thus could be seen as understating the price target but offsetting this is that the model never shows a decline in earnings and thus we feel the two balance out.”
There’s a lot to unpack out of those couple of questions, but the first thing that should jump out at you is that the model makes assumptions about what the world is going to look like in 2080 (65 years starting in 2015, check out the chart below). Of course there’s nothing stopping you from extrapolating your model out a couple of generations, just like you can tell Excel to keep track of ten decimal places when it does calculations, but it doesn’t mean anything. Treating all earnings as dividends seems aggressive, and we challenge you to find a company whose earnings haven’t slipped for 65 straight years.
Are those factors balanced out by the understated tax benefits? Who knows, you’d have to model tax liabilities out 65 years as well, and we’re not that confident in our future election predictions.
An overconfidence in model precision
But what’s really surprising is that Ascendiant apparently uses this synthetic dividend discount model to do all of their valuations. Maybe the model is extremely robust to perturbations and pulling it in to a more sensible timeframe would reach similar price targets. But it still signals the kind of overreliance on and overconfidence in modeling and projections that has gotten investors into serious trouble in the past.
Value investors will likely chuckle looking at the chart below.