Technology stocks and stocks, in general, are continuing to surge. Tesla continues its big move and is up almost $50 to $525 which pushes its overall market cap to $91 billion.
Tesla can conceivably be profitable for the full year in 2020. Tesla is a high growth stock and could have a PE of 100 to 150. If Tesla were to achieve $10-15 per share in net income for the year this would support a valuation of $1000 to 2200. There is a wide range of forecasts for Tesla’s earnings.
The big question for the year is how profitable the cars from the China factory will be, how many cars will be made at the China factory, will the China factory get expanded and what will the operating margin be on Tesla cars. If Tesla is able to grow its operating margin on cars from 21% in the third quarter of 2019, then Tesla will be very profitable for 2020.
Ark Invest forecasted that Tesla Model 3’s gross margin could double from early 2019 to more than 30% by March 2021.
Theodore Wright in 1936 developed Wright’s Law. It provides a reliable framework for forecasting cost declines as a function of cumulative production. Wright’s law saythat for every cumulative doubling of units produced, costs will fall by a constant percentage. Since it began taking shape in the early 1900’s, the auto industry has enjoyed an 85% learning curve – which has translated into a 15% cost decline with every cumulative doubling of units produced.
Through the second quarter of 2019 Tesla had made just over 275,000 Model 3s since its launch. According to Wright’s Law, Tesla Model 3 cost should drop by roughly 23% as it scales to an additional 600,000 cars which should occur by the end of 2020.
NOTE: Brian Wang owns Tesla Shares, Alibaba, Netflix and other technology stocks and funds.