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Comment by gwbas1c | Hacker News Reader

Remember, Tesla does more than sell cars. Their grid-connected batteries are extremely profitable.

A quick skim of the article makes no mention of Tesla's other businesses.

It's doesn't matter. Tesla's stock price is around 450 times its cash flow, which is an order of magnitude beyond insane for a public company. Apple is around 30. The average S&P500 company is around 15. For Tesla's stock to be worth the same relative to the company's business as Apple the stock should be 15X less than it is now. To justify this price they would have to sell 15X more vehicles. Apple's gross margins are like 30%, cars are probably just a few % due to the complexity of making something as big as a car. Unless Tesla becomes the only seller of cars in the world, there is no way it will ever be worth the current price.

Can you provide a citation for that 450x cash flow statement please?

Tesla's PE ratio for 2020 is 627; it is forecast to quickly decline to a more reasonable 144 in 2022.

https://www.nasdaq.com/market-activity/stocks/tsla/price-ear...

Stock prices are always based predicted returns over time. Their revenue growth for 2020 was 40%, 2019 14.52%, 2018 82.51%, and 2017 67.98%.

So, you really need to predict when that stops before you can get a reasonable estimate for sock value.

A more reasonable 144x in 2022 after 2 years of ~40% growth is the equivalent of ~282x today. That’s not exactly the huge drop people are expecting. In other words I do expect a drop, but I don’t expect short selling is a great risk adjusted investment.

That is also assuming the stock won't grow crazy in the next 2 years as well.

Yahoo Finance says PE ratio is 1200.

Q3 free cash flow was 1.4B. 640/1.4 = ~450. So stock price is currently about 450x previous quarter free cash flow.

So I guess that's what the grandparent meant.

Link: https://ir.tesla.com/

Weird to calculate a multiple based on a quarterly financial metric without stating it as such.

That's a strange metric you chose there. What's Airbnb's cash flow? Their market cap is $160b.

If you go to MSN Finance page for a stock, look at the Financials tab, Cash flow tab you see the value. Price/Cash Flow is a metric that can't be manipulated like P/E can since its based on revenue not profits.

Not quite. Growth and incremental returns on invested capital could greatly influence where a stock should trade. The market could be assuming Tesla doesn't have to expand factory capacity much after Germany or the margins on vehicles will go up as more customers purchase the self-driving option. Sometimes it's usual to assume a question to be true such as "what if every Tesla buyer bought the 'self-driving' package? next year and Tesla sold 30% more cars?" If Tesla is still trading at 100x cash flow in this unrealistic scenario?

They're extremely profitable, but they still contribute to Tesla profits and Tesla revenue that are factored into the P/E, and are still tiny in comparison to the current valuation.

Current valuation prices in future potential. And it's logical for it to do so. It's irrational to look at P/E and determine a company's value based on that.

Here's a thought experiment. It's not a realistic one and is not supposed to prove that Tesla is not overvalued, but just out of interest, I'd like to see some responses.

How would you value a company that has $10,000 profit this year and is expected to grow in profit 50% each following year and this growth would last infinitely?

What about a company that is expected to grow 50% each year until $1T profit?

I don't think anyone here has argued that possible future value can't override current P/E in principle. I'm certainly not arguing that. It's pretty obvious and well established.

It's even possible Tesla will eventually improve it's P/E ratio by at least 50x to reach a more typical figure. That's also quite plausible, after all the big car giants now weren't always world dominating conglomerates. No problem there either from me.

Where I think the current valuation departs from reality is the time it is likely to take to do that, and the risk that it won't happen at all. The current valuation only makes sense if that 50x ramp up in scale is pretty much guaranteed (not 10x, not 20x, but 50x at least) and will also happen in a few years. Technically they could be betting that the growth will be a lot more even than that, far bigger than the current entire car market, but with increased risk I suppose. I don't think that's what's happening though.

What's actually happening is these recent investors over the last 6 months have simply bet that the Tesla share price will shoot up in the near terms and they'll be able to flip the stock to turn a rapid profit, and they've been right. They've made no bet at all on Tesla's long term prospects. That's why Elon tweeted a few months ago that he thought the stock was over-valued.

PEG Ratio

Sure, and in theory directly selling to customers and manufacturing a higher percentage of parts should allow them to extract more profit per vehicle than using dealerships. EV’s also allow car companies companies to profit from ‘gasoline’ sales as the lower operating costs are linked to higher purchase prices.

However, none of that supports the insane increase in Tesla’s stock price over the last 2 years. That’s likely an artifact of so many short sellers which ironically drive up the price faster if a stock starts to rise, and with a 40% increase in revenue in 2020 some rise would be appropriate. As the saying goes the market can remain irrational longer than you can remain solvent.

A quick look at their 10Q does not show that their Energy generation and storage business is extremely profitable. It eeks out a small profit before operating expenses. That may change in the future. It is also a small business relative to their car business.

https://www.sec.gov/Archives/edgar/data/1318605/000156459020...

I would add that their competitive advantage now is not the cars, but the extensive and convenient charging network.

One regulation away from being standardized like it is in Europe.

Not to mention the biggest benefit of EV’s is charging at home.

I suspect that the Supercharger network will quickly become commoditized as charging stations appear everywhere. Every grocery store, mall, parking lot, and restaurant will put a few chargers in. This will be mostly to defend their business so that people with electric cars continue to patronize instead of going to a competitor with an electric car.

BTW: From what I understand, gas stations don't make much profit from the gas. I suspect the same kind of economics from operating a car charger.

Tesla doesn’t operate those batteries. They are merely a supplier, or in the Samsung case, a reseller.

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