I would like to recommend that the BFPT methodology is useful for more than just tracking stock prices. We can also use this framework to assess how Tesla needs to develop its capabilities to achieve its longterm goals. Particularly, we know that Tesla wants to reach $30.375B in revenue in 2019.
How do we know that? The basic plan is $6B revenue in 2015, growing 50% each year thereafter. That's $9B in 2016, $13.5B in 2017, $20.25B in 2018, leading to $30.375B in 2019.
So what capabilities are required to hit $30.375B in 4 years. The backbone to both the auto and stationary storage is Gigafactory capacity. Tesla generates nominally about $1000 revenue per kWh making cars. So if Tesla sold only cars in 2019, it would need 30.375 GWh of gigafactory capacity. By contrast, stationary generates nominally about $250 revenue per kWh. So the mix of auto and stationary sales determines how much revenue per kWh Tesla can make. 2/3 auto, 1/3 stationary generates about $750/kWh; hence, 40.5 GWh (30.375/0.75) is require. Under, this mix the Gigafactory can wait until 2020 to reach nameplate 50 GWh capacity. However, the recent view on stationary is that it may consume 2/3 of battery capacity, leaving 1/3 for auto. At this mix, Tesla generates $500/kWh, and a whopping 60.75 GWh capacity by 2019. If this path is pursued, there are two leading options: expand the Gigafactory to 75 GWh by 2020, or build Gigafactory 2 quickly enough to have about 12 GWh capacity in 2019. Quite possibly both paths need to be pursued for greater assurance of timely success and because Gigafactory 2 is absolutely needed by 2020.
So how does this help us as investors? We need to have clear expectation that Gigafactory 2 must start building within 3 years if the stationary business is to be pursued with gusto. Failure to set out a timely plan for this expansion would be a signal that Tesla is not prepared for the longterm growth envisioned in the BFPT. So we see that faith is not so blind. Concrete steps must be take to make the vision a reality. We can work backwards in this manner to derive other capabilities that must be developed in a timely manner. I'd encourage us to think through these issues.
Suddenly the Gigafactory does not look so big.
James I can certainly see why looking at where TSLA's current price is relative to its 52 week high and lows has some value. I can also see where Elon Musk's pattern of sharing long-term quantitative descriptions of his vision of Tesla are extremely helpful, even in cases like the Apple market cap comment where he explicitly clarified that this was not guidance (indeed, it led to my raising my estimates in my model, and increasing my valuation of the shares, but not to my assuming the numbers Elon shared. In fact, I started a thread within days to analyze whether Elon's goals were possible, and discuss what it would take to reach them).
All that said, clearly you want to make your trading decisions on the best possible tools, and I think there's an alternative to addressing the shortcoming you described as a motive in your constructing the BFPT.
In your first post on the BFPT (#2400 in the Long Term thread) you wrote,
"It's a matter of fitting model parameters to market prices, something which fundamental analysts almost never do. But truly it is the market that determines the discount rate, and analysts are foolish to think they know better how the market values future earnings from any source."
I do some discounting in the tool I use, but I do not see that as having the shortcoming you suggest.
I'll give a brief summary of how I make my estimate of Tesla so you can see my discounting in context. Here's what I do:
1. Construct bear, bull, and base case volume scenarios and corresponding earnings for 2020 and 2025 (now mostly I focus on 2025 for updates, as 2020 doesn't move around nearly as much).
2. Assign a probability to each scenario.
3. Calculate a weighted average of my expected scenarios.
These steps above are my way of accounting for the unknown of level of Tesla's future success, so as I understand it, this is where an aspect of discounting, discounting for risk in Tesla's execution, resides in my method.
4. Discounting for time value of money/risk of my imperfect forecasting. Based on the size of my Tesla position, the alternative investment options I have, and my level of confidence in my estimating the probable future returns for both, I've decided that as long as I see Tesla returning 14% or better annually, I have no interest in reducing my core Tesla position.
This is a discounting based on the level of expected returns I find warranting the size of my position in Tesla. It has nothing to do with what other market participants have got right, wrong, or are ignoring (i.e. swing traders, those using TA, those just reacting to the latest headline, etc) about Tesla's likelihood of reaching their publicly stated goals.
5. Using that discount I can estimate what my model sees as current fair value.
6. When Tesla is 25-30% below my fair value number, I add on trading shares in increments. I've added trading shares many times, and used up nearly all the money I'd put into trading quite close to the lows from the "f*res" and the recent selloff this winter. If it got 25-30% above fair value, I would consider decreasing my core position (it got close to, but did not reach this level at it's $290 peak last year). Fwiw, I've used this a couple years, and shared it on TMC about two years ago.
James, I'd say the biggest singular influence on my investing has been Warren Buffett. Buffett's mentor, Benjamin Graham, said
“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
I think the tool I'm using is aimed at keeping a steady focus on the weighing machine's number, and merely seeing the voting machine as a potential opening ("Mr. Market" as Buffett would call it) to buy, sell, or hold trading or core shares. Using a weighing machine I've had very little concern over the past couple of years with Tesla's volatility, both when the stock got ahead of itself, and when it was oversold. In fact, on multiple occasions, big sell offs have led to very nice trading profits. In fact, I used this method quite effectively for years with the other individual stock in my lifetime that I took a large position in, one, whose volatility made TSLA look like a blue chip, and which over 8 years provided terrific returns on my core position.
I really think the best and only way to make investment decisions is based on the relative current disparity of the voting and weighing machine. If you agree with me about this, I'll leave it to you to evaluate whether the BFPT does this.
