An Ode to Luck: Revisiting Tesla in January 2020

Tesla is a company that I have valued at least once a year for many years, and I have navigate a middle ground between those who love the company and those who hate. For most of Tesla's corporate life, I found Tesla to have potential but to be over priced, but in June 2019, I bought Tesla for the first time at $180. As luck would have it (and it was pure luck), the stock turned around and has not looked back since. Yesterday (January 29, 2020), the stock surged to hit $650 in the after-market after its most recent earnings call. I revisit and revalue the company in this session, and much as I want to continue to hold the company, I cannot justify continuing to hold it. I explain my reasoning, and you are welcome to disagree with it.
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Valuations

[DigitalJournalist]

This is literally the only reasonable analysis of $TSLA valuation I’ve seen, basically, at all.

[blueskies]

Thanks to you I picked up 100 shares at$180.

[CesarDominguez_]

You are incredible, teacher. I'm very happy to know that your tesla pick goes so much well!! you look very happy :D also you are a very humble guy and a great great great person and teacher. I was mising your videos!!! thanks for so much knowledge and fun!! :D
Greetings from Spain.

[RDMVDS]

Great insights as always, professor Damodaran

[remotaurog]

I remember that valuation at 190 and when it dropped to 180 I though well your usually 10 bucks out on your valuations, glad I took the plunge thanks for your work!

[shivkuma]

Prof. Damodaran, great balanced analysis as always; and a lot to learn from you in every video!

A few inputs / questions:

1. At the margin, TSLA is introducing a few high gross-margin, Software-as-a-service (Saas) that are applicable to the entire fleet over time, likely with a high attach rate (Eg: Tesla insurance, performance boost, FSD upgrade, premium connectivity). These are not big revenue contributors now but could become significant contributions to the bottom line due to high gross margin, and they apply to the entire fleet of cars (not just the incremental flow of vehicles) which is growing ~50% in unit terms annually. Would you model this as a separate line of business or as an add on to the vehicular flow business or as a real option? From what Musk seems to be saying, some of these tech improvements and monetization have an S-curve shape to it - which makes them hard to predict; and the value may accrue faster than linear imagination. In such cases of high variance in a significant component of cash flows, would you consider some option value piece?


2. Related to the point above: the sales-to-capital ratio of these software / autonomy services piece could be really high vs the S/C assumption of 2 or 3 on aggregate. Also based upon their China factory announcement it appears they are spending $10.5K / unit for their gigafactory there. ARK is modeling likely improvements w/ learning curves - curious if you could comment on learning curves and impact on sales-to-capital ratio.



3. Could you comment on any impact of competition catching on slower ? Does that impact your CAP assumptions or terminal value? Could you comment at what point do you split out the rest of their business lines (eg: Tesla energy)? Clearly matters are dominated by automotive revenue / cash flows for now.



4. Since the valuation changed from 190 to 425 in a short period (7 months), how would you model / factor potential changes in another 6-12 months if you just rolled forward your current assumptions, i.e. if the forward valuation by a few months is well in the money in price for a fast growth company with heavy optionality, would that be a consideration? Could this be an input in the sell / hedge decision? Currently it appears that even for heavy tailed cases, your choice seems to be to sell when the price > 90-th percentile.



5. from the conference call it appears the company may prefer to raise incremental capital as debt on a factory by factory basis - as they are doing in China and Germany -- rather than equity. Clearly debt in earlier stages was a risky move as you have explained. Curious if you think that debt makes sense now on a factory by factory basis as they become more capital efficient per incremental unit produced / ramped ?



Shiv

[ichoudhury]

My regret is having 'Stop-Loss" and automation reacted without any emotion way before the massive uptrend. Wish I was wise; but glad I am wiser now :). Thank you for your thorough analysis!

[Oro-Blanco]

Professor, thanks a lot for the analysis. Why don't you sell some covered calls to extend your gains

[sudhirkathuria]

Thank you professor !!

Selling call and converting into covered call looks better than buying puts given the premium in options. Just a thought from one of ur student ! Thank you

[RishabhJhol]

Did you get back into Tesla? It has run up like crazy. Looking for your next update, Professor!

[kefalos]

Really great review!

I think you are off on your operating margins which I think at minimum will go up to 16%, but have a good chance of approaching 30%. TESLA has a few aces up its sleeve with regards to these numbers that differentiate them from your typical automaker—in short think services, upgrades, manufacturing streamlines, tech, and other parts of their company such as energy/solar.

I am long TESLA.

[charlescharlotte]

Dear Professor, you say you are not good at the pricing game. Would share your performance in the value game ? Best wishes

[ricardopiovezanjr.]

Hi Professor,

I came back here to ask you a question.

What do you think of the euphoria in the past two trading days? Is it entirely a pricing game?

Thank you!

[pgmtbiker]

another great analysis sir! I wanted to point out, however, that buying a put later in the first year establishes a new holding period for the stock (and would disqualify your June long term capital gains qualification). In the eyes of the IRS, unless you purchased the puts on the same day as the stock (married puts), you must hold the position un-hedged for 1 year to qualify for long term capital gains.

[wm]

Thank you for sharing your thoughts with us. Congratulations on a great trade.

[rajeshji]

Thank you for honest valuation. Can you help with valuation of EAF?

[zhenghaorocks]

Revisiting this video after watching Tesla Daily's overall analysis. Now a tenbagger for Professor Damodaran, interesting times.

[VilleHyytiainenInvesting]

Bought at $180 and sold $650? Well done thats amazing timing! I averaged way higher purchase price and started selling way earlier.

[benjienatividad]

Excellent video prof... But I think Tesla has more upside since it's in the forefront of self-driving technology. This technology alone can disrupt the transportation sector. Hope to get more video from you regarding Tesla. 👍

[seeker]

🙏🙏🙏🙏 thanks for all the knowledge you are sharing.
I am praying that you held on to some of it a little longer... Tsla went so high... But then again you are right its the discipline that one must stick to... If its a value play then pricing shouldn't bother you much and you must stick the math...