Tesla

[Kaimin]

Many venture capitalists, and other investors of lost making tech companies, like Chamath Palihapitiya, Larry Page, and Jeff Bezos himself, cites Warren Buffett as a source of their inspiration. 

IMO, traditional value investors and investors in "lost making" growth companies operate with very similar principals: they invest in companies that could potentially make much more money in the future, discount the potential cash flow from the far future back to the present, then buy companies that are selling below their intrinsic value. 

The difference is, traditional value investors are more inclined to buy mature companies with proven business models, but lower growth potential (usually more concentrated portfolio of high quality companies with low risk, and moderate returns). And venture capitalists tries to buy companies with potential of very high returns (the next big thing; they usually have a very diversified portfolio of high risk companies; max lost is 100%, max return could be 100x).

Both strategies tries to achieve asymmetric risk-reward, with odds tilted in their own favor.

Everyone claims they buy stocks this way. And I think it is clear that not everyone is a value investor.

A value investor is an investor who insists on a margin of safety. In other words, he has concrete, rational proof that even in a sudden or unforeseen decline in the business, his capital is still preserved, i.e. he still owns a business that for the price he paid has reasonably earnings/returns. This is clearly not the case with these companies. You could say it is value investing if you use worst-case inputs for your discounted cash flows, which is not the case here. I don't think the worst case in a loss making company is ever that it starts making loads of money, except in exceptional cases like it closes down a highly unprofitable segment. Here you even have the opposite of a margin of safety, where even in a large and substantial rise in the business, your capital is not preserved. 


In the case of Tesla, you have a company valued as high as 60 billion this year. It has 12 billion a year in revenue, and makes no money. Now let's assume it stops bleeding cash and starts becoming profitable. Let's assume it has the profit margins of the Japanese carmakers at 6.2% - many times higher than American or European margins. Let's give it a 15x P/E ratio, more than 50% that of other car companies. Let's ignore it's debt and convertibles. It would be making 744 million and be worth 11.6 billion. We still haven't reached it's market value.

But lets go further and assume its revenue goes up five times and its earnings follow. That would mean it has 60 billion in revenue, and 3.7 billion in earnings. If you assume a P/E ratio of 16, then you would have reached its market value. So quantitatively it is clearly not a value investment.


But what about qualitatively? It's a good product for sure, but its manufacturing is a mess. By cars per employee, it is very inefficient, despite its claim of using robots extensively. It competes in very specific parts of the car market - specifically the mid priced sedan and luxury SUV markets. It has a price advantage as of now - if you believe what Musk says. At best you could say if it sorts out all its manufacturing issues, and the more optimistic margin predictions are true, and that the ten other carmakers trying to make EVs with ten times the R&D/manufacturing budgets don't interfere with the necessary meteoric rise needed to justify it - you would have a good company, even if the terms of investment are aboslute horrific.