World's Foremost Valuation Artist: Tesla is Overvalued

"Bob Loblaw Made Me Make a Phoney Phone Call to Edward Rooney" (braddelaparker)
09/05/2013 at 15:21 • Filed to: Tesla, TSLA, $TSLA

Aswath Damodaran is one of the preeminent voices in the nation (world) on the valuation of businesses. The dude literally wrote the book on the art of valuation; I should know, as I perform valuations for a living and am up to my neck in his work and his books.

My point in all of this is that, when Damodaran speaks, the investing community pays heed to what he says. That's why it's a big deal that he came out today and said he believes that Tesla is overvalued; massively so, in fact, calling it 67% overvalued, even using what he said was an "optimistic narrative."

Now, valuation is a very murky field. A valuation is subject to a lot of manipulation, estimates, and judgment. A few tweaks here and there and you can change the value of a firm by +/- 3-400%. However, Damodaran is well respected, and I have the utmost faith that his numbers and assumptions are as purely developed as anyone's. Also, the following assumptions lend credence to his estimates being Tesla-friendly:

Assumed potential sales equal to that of Audi's

Assumes potential profit margin equal to that of Porsche's, one of the highest in the biz.

Many will come in and pooh-pooh this valuation as the incoherent musings of someone in academia who has no clue what he's doing and certainly doesn't know the auto industry and what Tesla is capable of. Those of you who do so are choosing to be willfully ignorant of both what he represents to the valuation industry and of his analysis itself.

As for me, I'll be buying some puts this afternoon. And then I'll probably buy after I exercise those puts in however long, because I believe in Tesla as a firm, but certainly not at this price.

Read for yourself at the WSJ. Posting from my phone so it will take me a minute to get the link up.

http://blogs.wsj.com/moneybeat/2013…

DISCUSSION (13)

ddavidn > Bob Loblaw Made Me Make a Phoney Phone Call to Edward Rooney
09/05/2013 at 15:24

I wish I was smart enough to move stocks around like that. I didn't even know what a "put" was until you mentioned it.

BrtStlnd > Bob Loblaw Made Me Make a Phoney Phone Call to Edward Rooney
09/05/2013 at 15:28

Bear in mind that because a stock is fundamentally overvalued with an exponential P/E ratio... that doesn't mean it will be trading down soon or ever. Some companies and models are given higher valuations for a variety of reasons. I agree that by most measures of valuation TSLA is too damn high, but momentum is a really tough opponent.

The two best bits of advice I got in this business were: 1) your first loss is usually your best loss 2) don't try to catch a falling knife. Shorting TSLA seems like trying to catch a falling knife.

Mr. Ontop, No Strokes, No Smokes...Goes Fast. > Bob Loblaw Made Me Make a Phoney Phone Call to Edward Rooney
09/05/2013 at 15:30

Agreed, the price is through the roof, but even though Tesla is in a pretty traditional and highly competitive manufacturing arena, it seems his business model is anything but traditional. How does this affect the business model in the long run?

Joe_Limon > Bob Loblaw Made Me Make a Phoney Phone Call to Edward Rooney
09/05/2013 at 15:32

Sometimes I wonder if Tesla would be able to push a profit if it weren't for musks ability to hype his companies stock through the roof.

Bob Loblaw Made Me Make a Phoney Phone Call to Edward Rooney > BrtStlnd
09/05/2013 at 15:36

Shorting Tesla? No thanks. Buying some relatively cheap puts? Absolutely. I don't think the price will ever correct enough to bridge the gap between Damodaran's val and where it currently sits, but I do think a correction of some significance is in order.

Tesla is indeed riding a wave of momentum that's difficult to overcome, but they're also riding that wave on the back of some fortunate circumstances, creative (read: non-GAAP) accounting for reporting earnings, and without running into much hardship recently. It's been very smooth sailing for TSLA recently, and like all firms, they're going to hit a bump at some point, and I think that's where a correction will take place.

See also: AAPL. A darling, a perennial high flyer, lots of similarities to TSLA. All in all, no one expects AAPL to sustain stagnation or drops in price. But corrections can and do happen from time to time, even to Apple; it's healthy.

Bob Loblaw Made Me Make a Phoney Phone Call to Edward Rooney > BrtStlnd
09/05/2013 at 15:37

I also understand that i'm making a semantic distinction between shorting TSLA and taking a short position, but I do think it's relevant.

Bob Loblaw Made Me Make a Phoney Phone Call to Edward Rooney > Joe_Limon
09/05/2013 at 15:40

There's an element of that hype and momentum (as Brt pointed out). There's also the very favorable conditions that the local and federal government has created for Tesla to operate in, for better or worse, and some of those are running out of time.

Bear in mind that the Q2 "profit" was the result of of the aid of some creative (read: non-GAAP) accounting and some government benefits that are set to run out soon.

BrtStlnd > Bob Loblaw Made Me Make a Phoney Phone Call to Edward Rooney
09/05/2013 at 15:40

You didn't mention if your put was going to be a naked position or not but obviously you'd need it to come down before your contract expired. For all intents and purposes, it's basically a short.

Bob Loblaw Made Me Make a Phoney Phone Call to Edward Rooney > BrtStlnd
09/05/2013 at 15:45

It is, but the price of the loss on a covered put is potentially pennies on the dollar to that of a straight short, hence why I made the distinction.

Bob Loblaw Made Me Make a Phoney Phone Call to Edward Rooney > Mr. Ontop, No Strokes, No Smokes...Goes Fast.
09/05/2013 at 15:49

Doesn't really affect it, just the perception of it, at most. I think the thought is, and I agree, that as Tesla becomes bigger, they will have to become more traditional. Not necessarily traditional, but more so. That's why the use of Porsche's profit margins in the model is important to understand the valuation, as it provides what is pretty much the best case scenario for a traditional automaker; it would take something abhorrently untraditional to best that by a significant amount, and there's a question as to how long that could last.

Victorious Secret > Bob Loblaw Made Me Make a Phoney Phone Call to Edward Rooney
09/05/2013 at 18:08

I think Tesla can only ask for as much as Musk can boast about, and Musk won't stop boasting till we all have $20k Tesla Model Hatchbacks.

I'd like to think that the product really does speak for itself and that the where they are right now is just the tip of a hilariously large iceberg for the industry in general.

Bob Loblaw Made Me Make a Phoney Phone Call to Edward Rooney > Victorious Secret
09/05/2013 at 20:55

That's the thing, though: you can't price into Tesla's value a future benefit that is very obviously going to be shared with the rest of the industry, even if it's Tesla that prompts it.

Tesla is doing some great things, and it's a great product, but there's an issue that arises with killer apps eventually: someone, either established players or newcomers, catches up. There's a great discrepancy up front, but over time that gap closes and the excess profits slim down.

JasonStern911 > Bob Loblaw Made Me Make a Phoney Phone Call to Edward Rooney
09/05/2013 at 23:43

The real question to Tesla's long-term value is patents and intellectual property. if they have built themselves a nice barrier to entry with regards to EV technology, then they have a good future if for no other reason than licensing and lawsuits.