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An Ode to Luck: Revisiting My Tesla Inc (TSLA) Valuation

When investing, I am often my own biggest adversary, handicapped by the preconceptions and priors that I bring into analysis and decision making, and no company epitomizes the dangers of bias more than Tesla Inc (NASDAQ: TSLA). It is a company where there is no middle ground, with the optimists believing that there is no limit to its potential and the pessimists convinced that it is a time bomb, destined to implode. I have tried, without much luck, to navigate the middle ground in my valuations of the company and have been found wanting by both sides. For much of Tesla’s life, I have pointed to its promise but argued that it was too richly priced to be a good investment, and during that period, Tesla bulls accused me of working for the short sellers. They did not believe me when I argued that you could like a company for its vision and potential, and not like it as an investment.

 

When I bought Tesla in June 2019, arguing that the price had dropped enough (to $180) to make it a good investment, they became my allies, but that decision led to a backlash from Tesla bears, who labeled me a traitor for abandoning my position, again not accepting my argument that at the right price, I would buy any company. I would love to chalk it to my expert timing, but luck was on my side, the momentum shifted right after I bought, and the stock has not stopped rising since. When Tesla’s earnings reported its earnings yesterday (January 29th), the stock was trading at $581, before jumping to $650 in after-market trading. It is time to revisit my valuation and reassess my holding!

 

Tesla Motors Inc (NASDAQ:TSLA), Car, Model S, Sign, Showroom, Brand, Logo, automotive, sales

Hadrian / Shutterstock.com

 

 

Tesla in June 2019: A Story Stock loses its story!
It was in June 2019 just over seven months ago, when the sky was full of dark clouds for Tesla, as a collection of wounds, some internal and others external had pushed the stock price down more than 40% in a few months, that I took a look at the company and valued it at just over $190 per share:

 

Download spreadsheet

 

In arriving at this value, I told a story of a company that would grow to deliver $100 billion in revenues in a decade, while also earning a 10% pre-tax operating margin. One concern that I had at the time was that the debt load for the company, in conjunction with operating losses and a loss of access to new capital, would expose the company to a risk of default; I estimated a 20% probability that Tesla would not survive.  At the time that I wrote the post, I posted a limit order to buy the stock at a $180 stock price, and when it executed a short while later,  some of you pointed out that I was not giving myself much margin of safety. I argued that the distribution of Tesla value outcomes gave me a much larger chance of upside than downside. At the time of the investment, I also described the company as a corporate teenager, with lots of potential but a frustrating practice of risking it all for distractions.

 

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