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Analyst Read: Tesla

What position should you take on $TSLA?
(Ascannio)
(Ascannio)
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I read some intel from Goldman Sachs’ trading desk and their stock market predictions for the next two months that I will summarize in our premium newsletter Making Cents this weekend.

To clarify my position on Tesla ($TSLA), I am a mild $TSLA bull. I believe there is more upside to the stock on a 10-year timeline and that Tesla will continue to grow and innovate, but the elevation and uncertainty of the stock’s valuation keeps it as a smaller position.

Basic financial theory keeps me from calling for a $2+ trillion market cap within a 3-5 year timeframe, unlike a lot of the Tesla hyperbulls on the internet.

The vast majority of Tesla’s current value does not come from near-term cash flows, but instead comes from its “Terminal Value” in year 10-20. Investors are assuming the size of the electric vehicle (EV), electric trucking, autonomous driving, and battery storage markets 10+ years down the road and then assigning probabilities that Tesla dominates those industries.

Assets whose valuation relies heavily on Terminal Values tend to see their prices swing violently on sentiment about outer-year hopes. Also, it’s in these types of assets that I see the phenomenon of internet “hyperbulls” or “permabulls”. Bitcoin is another example of an asset like this.

But make no mistake about it, there is an upper limit on how valuable $TSLA can get. It would be hard to argue that $TSLA could ever be worth $20 trillion on $4 trillion in revenues. That would imply that end-state Tesla would be making a fifth of U.S. GDP in revenues. 

I don’t disagree that if Tesla can absolutely dominate EVs, autonomous driving, and energy storage, it could become the most valuable company in the world. But you need to believe they achieve a ton to get there. 

In order to believe in 3-5x from here, you have to use faith to believe in its size in 10 years. It’s hard to be analytical about undeveloped products 10 years down the road. If we can’t be scientific and repeatable with our investing style, then it’s not actually a strategy and merely faith and fandom.

Trust me, I’ve looked up to Elon Musk as a role model since college a decade ago and my fandom lets me slap a $700 price target on $TSLA on wildly optimistic assumptions. But it’s not a core position because I can’t get conviction that it will go up on the basis of revenue growth meeting valuation within the next 3-5 years.

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