Elon Musk: Please Read Our Paper On Tesla (TSLA)

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Elon Musk: Please Read Our Paper On Tesla (TSLA)
Blomst / Pixabay

Elon Musk: Please Read Our Paper by Brad Cornell, Brad Cornell’s Economics Blog

About six months ago, when Tesla was trading north for $250 per share, Aswath Damodaran and I published a paper arguing that a price of $250 per share was next to impossible to rationalize on a fundamental basis.  Even making optimistic assumptions, we arrived at a fundamental valuation on the order of $100 per share.  Since then, Tesla’s price has melted down to a less stratospheric $200.  Still high by our reckoning, but not ridiculous.  What is ridiculous is the recent statement by Elon Musk that within 10 years Tesla’s valuation may approach Apple’s current $700 billion market capitalization.

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To see why, start with a simple calculation.  At $200 per share, the market capitalization of Tesla is $25 billion.  As a rough ballpark estimate, a fair risk adjusted rate of return on an investment in Tesla is about 10%.  Because Tesla does not pay a dividend, shareholders must earn all of this return in the form of stock price appreciation.  Assuming that Tesla appreciates at 10% per year for 10 years, the market capitalization will rise to $65 billion, less than 10% of Elon Musk’s target of $700 billion.

As a been stressed often on this blog, value creation on the order of that contemplated by Elon Musk requires that a company earn returns far in excess of the cost of capital over extended periods of time.  That requires significant barriers to entry because every current and potential competitor will want to capture some of those excess returns.  In an industries as established as automobiles and batteries, it is hard to imagine that knowledgeable competitors, of which there are many, will sit back and allow Elon Musk to earn extraordinary returns for decades at their expense.  If a new automotive design looks promising, they will adopt it.

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Of course, there is the example of Apple.  Apple’s market capitalization exceeds $700 billion because the company has been able to earn excess returns for more than a decade and the market expects it to continue for another decade.  But Apple is unique.  The company’s remarkable innovation, in conjunction with a strategy of coordinating software, hardware and design, has been brilliant.  Apple has also been benefited from a series of “butt fumbles” by its competitors that would make the New York Jets proud.  There is no evidence to date that Tesla is comparable to Apple in either respect.

In short, for Tesla to be worth anything close to $700 billion in 10 years the company would have to move at “ludicrous speed.”  A potentiality that, from the point of view of any reasonable valuation model, is ludicrous.

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45 COMMENTS

  1. Great comment that articulates an argument I have made many times. Thought I would go further to point out that the economic formula you describe is not limited to the prison dilemma or is soluble by merely moving slowly. That may be an etiquette issue on my part because while true, I also know that most people cannot handle the truth, at least not all at once. Merely advertising a me-too EV that represents a cheaper and better value proposition than its ICE equivalent would implode any company dependent on ICE vehicle sales for survival with comparatively minimal harm done to Tesla.

    As for Damodaran’s valuation model, he disproved that himself by producing two back to back valuations some months apart, both based on discounting a 2024 time horizon. The method used to produce the first was unable to predict Tesla’s ability to add value that made the second work-up necessary.

  2. He managed to bring together a lot of talent from software , coding, retired NASA people (lol) , engineers , to form SpaceX.. I think that in itself would require a super human feat to do by one self. I mean, it takes whole departments and billions of dollars for a nation to do that

  3. Agreed. There is much evidence that Tesla is far more innovative than other car manufacturers, in fact any mechanic can see their seperated by a technological chasm.
    And when they eventually build plants in China, just like Apple, their returns will increase even more . How many American car makers can say the same?

  4. It is easy to imagine how other automakers will sit back and allow Tesla Motors large returns. GM, Ford, MB, Toyota, etc., have billions of $ of assets invested in gas car tech in the form of intellectual property, tooling, manufacturing assets, ongoing R&D, and human resources. To fully engage in BEVs, these gas car automakers would have to write off these billions in assets immediately, which is fiscal suicide. They’d be killed in the stock market and that CEO would be kicked out. No one gas car maker will go first. It’s the Prisoner’s Dilemma.

    Instead these automakers must amortize these gas car assets over 20 years, moving only gradually away from gas car tech. Therefore, for the current foreseeable investment timeframe, Tesla Motors, with no assets in gas car tech, can fully engage in BEVs facing very weak BEV competition, giving this young carmaker a very unique advantage. That uniqueness makes valuation very difficult for analysts.

    I’m glad to see the many other comments debunking this article. Maybe $700B is optimistic, but I’d be happy with $70B because I’m long TSLA starting at $35/sh. I am long AAPL too, at split-adjusted 70c/sh starting in 1998. I see much in common between these two.

  5. As Elon Musk has said many times (and few seem to hear it), the best advice he has is to “reason from first principles”. The clown that wrote this article (which is full of typos and grammatical errors) is not even aware of such a concept. His arguments are similar to those that have been used to predict the failure of the television, personal pc, cell phones, the internet, etc. He looks around him, tries to make sense of what others are doing and then attacks anything that doesn’t coincide with the clumsy world view he has.

  6. The reason why money is rushing to Elon, is that he was right and now has a substantial early lead on all his competitors. One you start winning, its hard for others, even established players to fight back. Look at IBM vs Microsoft, or FaceBook vs MySpace, or Google vs Yahoo, or Apple vs the entire Eplayer industry. Elon’s platform demonstrated the fundamental and growing superiority of the EV platform over the ICE platform. Now Tesla is on a path to produce millions of vehicles per year in the early 2020’s with virtually no serious competition because the entrenched players didn’t take it serious enough. It’s Deja vu all over again.

  7. ” The company’s remarkable innovation, in conjunction with a strategy of coordinating software, hardware and design, has been brilliant. Apple has also been benefited from a series of “butt fumbles” by its competitors that would make the New York Jets proud. There is no evidence to date that Tesla is comparable to Apple in either respect.”

    Oh yeah, Tesla definitely has no strategy of coordinating hardware, software, and design. Mostly outsourced. Right-o.
    And certainly no innovation from them….basically just copying exactly what the other car manufacturers are doing.
    And yep, definitely no “butt fumbles” by other car manufacturers. Tesla’s definitely not ahead of them in battery production, charing network infrastructure, and general quality of vehicle.

    Like, who write this stuff? It’s laughable.

  8. “experts” used to doubt the exponential growth of companies like Apple, Google and Facebook when they were still young too. Well, we all know how that turned out.

  9. Don’t waste Elon’s time with such complete drivel. What you numbskulls don’t understand is that fundamental modelling like Damodaran’s model appreciates just as fast as TSLA stock price just trailing by 6 months. No really. Damodaran published at $130 was it? and then months later republished at $200. There is NOTHING to stop Elon delivering 50% compound annual growth rate for a decade. He’s at least as smart and as bold as Jobs was, and massively better educated. Job’s career is just well documented hindsight. No reason to imagine that in 10 years Muak cannot do what Jobs did in 30.

    As for the idea of other companies not allowing Musk’s Tesla to see all the action – that is such a naive assumption it is a joke. Existing vehicle manufacturers are totally dependent on ICE revenue streams. They cannot afford to promote a vehicle that would cause their customers to abandon the internal combustion engine on the basis of value for money and no need to pay at the pump. Tesla can. That is the pure essence of tech disruption. There is nothing that the likes of Ford, GM and Toyota can do about it whatsoever.

  10. Rimac? seriously? Nice concept sports car, but let me know when they’re making 1000 cars/week.

    Easy making a car company? Get a clue.

    Apple making cars? Steve jobs would school you on core competency

  11. Rimac? seriously? Nice concept sports car, but let me know when they’re making 1000 cars/week.

    Easy making a car company? Get a clue.

    Apple making cars? Steve jobs would school you on core competency

  12. Rimac? seriously? Nice concept sports car, but let me know when they’re making 1000 cars/week.

    Easy making a car company? Get a clue.

    Apple making cars? Steve jobs would school you on core competency

  13. Where to begin with this article, flawed thinking doesn’t even begin to cut it. Delusional and quite possibly “status-quo threatened” is probably closer to the truth.

    “But Apple is unique. The company’s remarkable innovation, in conjunction with a strategy of coordinating software, hardware and design, has been brilliant.”

    May be true, may not be true, but then Elon Musk came along and raised the entrepreneurial bar completely post PayPal with Tesla, Solar City & SpaceX. With all due respect, designing cute phones, laptops, gadgets for profit is one thing, but seeking to place an entire civilization on Mars hundreds of millions of miles away, building a sustainable energy based future here on earth is something else entirely. Oh and what you just described; innovation, coordinating software, hardware and design IS ELON MUSK personified, have you looked at Tesla recently? Jobs could only dream of having 1% of the all-round intellect, capabilities across design, technology and business that Elon has and now sadly, he’s no longer on this earth to watch one of the greatest minds of our time develop. As for Tim Cook, he should immediately resume the role of Chief Admin & Logistics because that’s all he’s good for, he’s no innovator.

    If Apple was really shrewd, given this new world we’re about to transition towards, they’d immediately acquire Tesla, and
    demand Musk becomes Chairman, CEO & Chief Product Designer. Give him ANYTHING he wants in blood and simply get out the way.

    Anyone that dares to bet against him is delusional going off his track record. At the helm of 3 separate industry sector Start-Ups, developed into multi-billion $ corporations virtually at the same time from scratch, in addition to Zip2 & PayPal having never had a company fail. Idiots have been betting against Musk for years and every single time he’s obliterated the naysayers across any industry he’s decided to focus on.

    In time in our view, he will prove to be the greatest entrepreneur, innovator, inventor, engineer, scientist, business mind (take your pick) of the 21st century, quite possibly that ever lived. The new super-breed of conscientious entrepreneur the world needed.

    Let us remind you bankers and stockbrokers quite clearly. An energy economy, facing diminishing returns from rapidly depleting fossil fuels,impacts of climate change, plummeting EROEI ratios now transitioning towards the rise of growing sustainable based solutions, combined with human/technology based ingenuity & effort across the food, energy, water security nexus IS the “Real Economy” underlying the multi-layered complex money economy! Finance merely masks the physical finite nature of the world we live in, but now post 2008 it’s becoming obvious to most, that both the real economy and money economy are zooming off in opposite directions. We know which ship we’re getting on, it aint the flagship 19th/20th century hubris based HMStatus-Quo Titanic.

    Wasn’t it Jim Rogers that recently said, “bankers and stockbrokers will soon be driving taxis, the smart ones will learn how to drive tractors for the smart farmers, or better still become smart farmers.”

    Apple, like the rest of them, needs Musk more than Musk needs Apple. In time this will become self-evident, or in the language of Iron Man himself, “this will become super-obvious”.

    Elon Musk is nature’s gift, nature’s catalyst bestowed upon earth, dedicated to those young souls who may not have the same benefits of 2 billion years’ accumulated energy reserves that previous “me me me” generations obliterated through
    in less than 300 years, with little after-thought of future generations.

    So you can carry on with your “short-term” next Q profit at all costs paradigm. You keep re-arranging chairs on the Titanic; you keep blowing the trumpet, playing the band, locking the poverty stricken in lower compartments.

    Not in our name! We will no longer play these games by your rules for nature has bestowed upon us a mind so fiercely intelligent, so bright, so inspiring, so conscientious, as SpaceX employees have attested, “we would follow him into the gates of fire with suntan lotion” if we had to.

    He’s showing us the way, shining the light and that is deeply inspiring for us as a civilization, short term profit seems so irrelevant given the mega-macro trends.

  14. Where to begin with this article, flawed thinking doesn’t even begin to cut it. Delusional and quite possibly “status-quo threatened” is probably closer to the truth.

    “But Apple is unique. The company’s remarkable innovation, in conjunction with a strategy of coordinating software, hardware and design, has been brilliant.”

    May be true, may not be true, but then Elon Musk came along and raised the entrepreneurial bar completely post PayPal with Tesla, Solar City & SpaceX. With all due respect, designing cute phones, laptops, gadgets for profit is one thing, but seeking to place an entire civilization on Mars hundreds of millions of miles away, building a sustainable energy based future here on earth is something else entirely. Oh and what you just described; innovation, coordinating software, hardware and design IS ELON MUSK personified, have you looked at Tesla recently? Jobs could only dream of having 1% of the all-round intellect, capabilities across design, technology and business that Elon has and now sadly, he’s no longer on this earth to watch one of the greatest minds of our time develop. As for Tim Cook, he should immediately resume the role of Chief Admin & Logistics because that’s all he’s good for, he’s no innovator.

    If Apple was really shrewd, given this new world we’re about to transition towards, they’d immediately acquire Tesla, and
    demand Musk becomes Chairman, CEO & Chief Product Designer. Give him ANYTHING he wants in blood and simply get out the way.

    Anyone that dares to bet against him is delusional going off his track record. At the helm of 3 separate industry sector Start-Ups, developed into multi-billion $ corporations virtually at the same time from scratch, in addition to Zip2 & PayPal having never had a company fail. Idiots have been betting against Musk for years and every single time he’s obliterated the naysayers across any industry he’s decided to focus on.

    In time in our view, he will prove to be the greatest entrepreneur, innovator, inventor, engineer, scientist, business mind (take your pick) of the 21st century, quite possibly that ever lived. The new super-breed of conscientious entrepreneur the world needed.

    Let us remind you bankers and stockbrokers quite clearly. An energy economy, facing diminishing returns from rapidly depleting fossil fuels,impacts of climate change, plummeting EROEI ratios now transitioning towards the rise of growing sustainable based solutions, combined with human/technology based ingenuity & effort across the food, energy, water security nexus IS the “Real Economy” underlying the multi-layered complex money economy! Finance merely masks the physical finite nature of the world we live in, but now post 2008 it’s becoming obvious to most, that both the real economy and money economy are zooming off in opposite directions. We know which ship we’re getting on, it aint the flagship 19th/20th century hubris based HMStatus-Quo Titanic.

    Wasn’t it Jim Rogers that recently said, “bankers and stockbrokers will soon be driving taxis, the smart ones will learn how to drive tractors for the smart farmers, or better still become smart farmers.”

    Apple, like the rest of them, needs Musk more than Musk needs Apple. In time this will become self-evident, or in the language of Iron Man himself, “this will become super-obvious”.

    Elon Musk is nature’s gift, nature’s catalyst bestowed upon earth, dedicated to those young souls who may not have the same benefits of 2 billion years’ accumulated energy reserves that previous “me me me” generations obliterated through
    in less than 300 years, with little after-thought of future generations.

    So you can carry on with your “short-term” next Q profit at all costs paradigm. You keep re-arranging chairs on the Titanic; you keep blowing the trumpet, playing the band, locking the poverty stricken in lower compartments.

    Not in our name! We will no longer play these games by your rules for nature has bestowed upon us a mind so fiercely intelligent, so bright, so inspiring, so conscientious, as SpaceX employees have attested, “we would follow him into the gates of fire with suntan lotion” if we had to.

    He’s showing us the way, shining the light and that is deeply inspiring for us as a civilization, short term profit seems so irrelevant given the mega-macro trends.

  15. Ston ranting troll. Jobs is not around to defend himself. There are 23 year olds building electric cars faster than Elons, it’s that easy… Google Rimac. If Tesla did it well, Apple can obliterate them at it v easily and mass produce too.

  16. Guy lives in a complete fantasy world. I love that these ranters about Elon all share 2 things: No real life business experience, innovating or running anything. 1) No market or marketing understanding to realize a lot of Elon’s product won’t be bought in mass ammounts, except for the model 3.

    When he threw Iron Man in there (which we’ve all found out wasn’t based on Musk since they did it decades before the guy was born) it was clear what kind of brainwashed individual we were dealing with, these mindless trolls still spew their bad energies around. Musk might be the best con job out, a great engineer, but his business sense is faulty at best, Let’s not forget Paypal was existing pre-Musk and was a team that ended up being super successful as individuals. These are his first companies by himself. First.

  17. Here’s how I read Musk. He just announced he will be coming out with a home battery module soon. He has Solar City to put the panels on the roof, he’ll have the battery to collect the solar power, and then he’ll have
    the electric car you drive home and plug into the battery. Seems like he wants
    to be BYD Company. Only difference is BYD already has the huge infrastructure
    in place under ONE company. As well as making the batteries, LED lighting,
    solar street lights, electric buses, affordable electric cars, etc, etc. And did I mention BYD is backed by Warren
    Buffett? I can’t wait for Buffett to bring BYD stateside. Buffett just bought Duracell also. Wonder what the plan is.They have
    the resources to last. Musk has a history of going broke. Musk also has the re-release of
    the Fisker Karma this year as competition to worry about. Might be time to
    park the Tesla next to the DeLorean. If Apple really wants an innovative company that makes it happen they should buy BYD. Musk is just copying everything they have been doing.(except for the overpriced sports car that will serve just the privileged few)

  18. One org under Jobs who’s now passed away, may he rest in peace, made a few nice looking phones, laptops, gadgets during times of plenty and kudos to an incredible company for seizing the moment, the others under Musk’s command, are quite literally transforming civilization, including plans for planets hundreds of millions of miles away. We’re sat with our jaws on the floor that anyone could even dare to question him, bet against him after all he’s achieved, the new super breed of 21st century conscientious entrepreneur that we feel is only just getting started.

    To us it seems blindgly obvious. Even Google said it would be wiser to simply give all your money to Musk, he’d do more with it than any other oganization.

    It’s just no contest, Apple under Tim Cook versus Tesla, SolarCity, SpaceX under Musk. The stuff going on at SpaceX alone is enough to wipe the floor with Apple. This guy took on the combined might of 4 superpowers in the space race and he’s winning on a budget when he was told it was simply impossible.

    How many times do we hear the words, it’s impossible, can’t be done, you’re going to fail etc.

  19. People have been betting against Elon Musk for over a decade, and they always lose. With the home battery Tesla is developing and the 39% of the home energy market that his third company Solar City commands, he’s poised to take control of the entire power grid of the United States in the next decade, and not just control it, revolutionize it, make electricity cheaper than it has ever been, and set up as many charging stations as there are gas stations today. Evaluating the future worth of Tesla Motors at 700 billion dollars, is low balling it.

  20. People have been betting against Elon Musk for over a decade, and they always lose. With the home battery Tesla is developing and the 39% of the home energy market that his third company Solar City commands, he’s poised to take control of the entire power grid of the United States in the next decade, and not just control it, revolutionize it, make electricity cheaper than it has ever been, and set up as many charging stations as there are gas stations today. Evaluating the future worth of Tesla Motors at 700 billion dollars, is low balling it.

  21. Agreed. I meant it’s closer than anything else, at least on paper. And overall I see it as a positive development (vs. something like bmw, merc, and porsche trying to shock Tesla with a hybrid).

  22. I agree but I think long term the investment will pay off monetarily, not just in terms of advancing EVs/sustainable energy… It’s just going to take time.

  23. An ignorant rant. Go drive a Model S, perhaps the P85D, and report back that it’s not unique if you still believe it afterwards. Tesla is an extremely unique company. You can learn a lot from actually getting hands-on vs sitting behind a computer and reading financials. 10% growth is ridiculously low: this company is building out what it needs to mass produce cars and is not selling anywhere near what it can, with supply being constrained and demand being sky high even for the expensive Model S. The $30k 2017 Model 3 is a game changer. The price of this stock is forecasting what will happen to Tesla’s earnings when it delivers on a mass produced vehicle, with a great deal of a discount for uncertainty and risk (since if it succeeds and a mass produced vehicle is reality, the market cap will be enormous).

  24. This is why 70% of Wall Street analysts cannot beat the S&P 500; their thinking is too traditional and orthodox. One could have read this same article on why Apple would never be as large as Microsoft, provided you used a high school math formula and do not know how to value ideas, execution & those who create the future instead of attempting to evaluate it
    using metrics of the present.. Telsa is a cutting edge technological energy company. So how much does the world spend each year on energy? What would Tesla’s valuation be if they cornered 5-10% of this market with patents everyone else needs to deliver gigawatts of clean energy? Think Different…

  25. Assumptions in this article are not correct, specifically 10% annual appreciation. Tesla is building out infrastructure and investing heavily into expansion of production capacity (including the gigafactory), so in a couple of years it’s able to mass produce Model 3 at ten times current volumes. At which point the stock price will become justified. Current high price is the cost of investing into future success.

    As Musk stated, Tesla is hoping for a competition, to move the world away from burning gasoline. There has not been much competition to date, nor is there any real competition on the horizon. Bolt is close, but Tesla seems to have better specs (of course not comparing real specs at this point), plus much better charging infrastructure.

  26. Assumptions in this article are not correct, specifically 10% annual appreciation. Tesla is building out infrastructure and investing heavily into expansion of production capacity (including the gigafactory), so in a couple of years it’s able to mass produce Model 3 at ten times current volumes. At which point the stock price will become justified. Current high price is the cost of investing into future success.

    As Musk stated, Tesla is hoping for a competition, to move the world away from burning gasoline. There has not been much competition to date, nor is there any real competition on the horizon. Bolt is close, but Tesla seems to have better specs (of course not comparing real specs at this point), plus much better charging infrastructure.

  27. So you admit that your paper you wrote about 6 month ago was wrong. So why should Musk bother to read it?

    And why do you assume the stock would appreciate only 10% per year when Musk is aiming for almost 200% growth per year? On top of that, you are assuming Tesla stock would never give dividends. Once Tesla reaches the end of their growth phase, dividends may be an option.

  28. I don’t think that Elon is talking 10% growth over the next decade. Why waste time making obvious argument that 10% over 10 years will not get you to 700b? He is talking about his vision of the sea changes in one or more related industries (home energy markets, wide adaptation of electric vehicles creating a mass market in which TESLA is position to be a front runner and may take a significant share, etc) and one may or may not believe in it, but if one acknowledge possibility of such a dramatic changes and TESLA leading the way, applying a linear 10% growth model to TESLA is silly.

  29. 25.55 billion / 35k = 730k.

    That said, comparing GM to Tesla is nonsense. Because you factor in future growth. Next year, Tesla will sell almost 2X the cars. GM will sell about the same. On top of that, GM had a bankruptcy on their shoulders and the whole hiding about killing people with their cars.

  30. Folks:

    The value of Tesla Motors shares have nothing to do with ‘valuation’!

    If you are investing money in Tesla Motors shares to make money through dividends, shorting of just selling them at a profit, you’ll get what you deserve… nothing!

    If you invested in Tesla Motors to accelerate the advent of transportation electrification, moving to a sustainable energy economy and the very future of humanity, your money couldn’t be in a better place.

    Those authors who write about the ‘value’ of Tesla Motors shares by comparing them to the usual selfish personal gain goals of the stock market are wasting your time and mine by missing the points I mention above.

    tinker

  31. You would’ve said the same thing about Apple 10 years ago so this is just nonsense because Tesla is actually making grounds in change and the designs are remarkable and have the same basis as the first iPhone did when it was released.

  32. TSLA’s market capitalization works out to $850,000 per car sold. GM’s is $7,000 per vehicle sold. From the Ruaiyat:”….nor hear the beat of a distant drum.”

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