Using the Price Earnings Ratio Has Kept You Poor

Tesla now has a $780 billion market capitalization.

I wrote in August, 2020 that Tesla will overcome denial within 8 months to become a $1 trillion tech giant. Five months have passed. A surge to $1100 per share will make Tesla a trillion-dollar company. Tesla will not stop there.

You Could Have Bought Amazon 20 Years Ago and Become Rich -But You Use PE Ratio to Analyze Stocks

However, there is still denial. The most common denial is around PE (Price Earnings) ratio.

If a company’s stock is trading at $100 per share and the company generates $4 per share in annual earnings, the P/E ratio of the company’s stock would be 25. It would take 25 years of accumulated earnings to equal the cost of the investment. This is for a company without growth. They usually the past years earnings. There is also forward PE which uses the consensus estimate. Forward PE. Morningstar calculates Apple’s forward PE at about 28 (as of early August 2020).

Amazon had a PE ratio over 1000 several times. In 2012, Amazon had a PE ratio of 3600. It has gone up 12 times since then. In 2013, Amazon had a PE ratio over 1000 and it went up 10 times since then. As recently as the end of 2015, Amazon had a PE ratio over 500.

PE ratio tells you where the company was. Forward PE means you are at least estimating what the company will do in the coming year. PE can work pretty well for companies with modest growth or no growth. This is helped by looking at PE ratios for industries. Software companies can have 10-15% growth and good margins. This gives that sector a PE ratio of about 60. The coal industry only has a PE ratio of 6. The coal companies have no growth and are shrinking. They are dying industries.

High growth companies require a bit more work to understand and project. You can compare price-earnings with expected annual growth. This is the PEG ratio. If you were picking among the high growth companies, you could look at the PEG ratio and use that if you want to say that one of the high flyers is expensive relative to another.

Gary Black had an analysis of Tesla focused on the next five years. I am more bullish than Gary. Gary is using a more conservative analysis and this analysis only includes forecasting the automotive business. Gary indicates that EVs could become 30% of all new car sales in 2025. A massive Green New Deal could further accelerate the switch to EVs. Federal tax credits of $10,000 per vehicle combined with a $25,000 Tesla EV would mean Tesla EV would cost $15,000 to the consumer while Tesla would make $25,000.

Tesla has the ability to build gigafactories in 12 months. Tesla is expanding Gigashanghai and building out Texas and Berlin. Tesla could add 2-4 gigafactories a year and add many new car models. They could create cyberVans, cyberminiVans, CyberSUVs, CyberminiSUVs and compete in all categories.

It is worth it to do some simple spreadsheet analysis of projected margin growth, factory growth and vehicle production increase. It is worth it to actually understand the business models and projected growth of the high growth companies that have been dominating the stock markets for 20 years. If they have been working for 20 years, maybe they are not a bubble. If there is a bubble maybe it is only for a few months. Pull backs will happen. If you don’t know when to expect them and how large the pullbacks will be then your understanding is not good enough.

You can ignore pullbacks and surges by using dollar-cost averaging. Buy once a month or once very 3 months to get an averaged purchase price.

In terms of demand, Tesla is selling every car they make without advertising. Tesla makes gross margin of $10,000 to $20,000 on every car they make. Volkswagen is losing $4000-5000 on every EV they make. GM is losing about $15,000-20,000 on every EV they make. GM was already losing money on each Bolt they make but they are selling the Bolts at $12,000 below MSRP.

Tesla production and sales over 9 years is showing 50%+ growth in car sales
2,650 cars sold in 2012. Market cap $4 billion
22,000 cars sold in 2013. Market cap $18.5 billion
31,500 cars in 2014. Market cap $27 billion
40,000 cars in 2015. Market cap $31 billion
76,000 cars in 2016. Market cap $37 billion
103,000 cars in 2017. Market cap $54 billion
244,000 cars in 2018. Market cap $55 billion
357,000 cars in 2019. Market cap $81 billion
e 510,000 cars in 2020 (despite COVID-19 shutdowns that reduced by 70,000)

In 2012, Tesla Model S was the 4th best selling plug-in player.

In 2012, Chevrolet Volt sold 7,113 cars.
Toyota sold 5,016 of their plug-in Prius
Nissan sold 4,607 LEAFs. They had a range of 70-138 miles.

The 2012 Volt was a hybrid. Range: 35 mi battery-only, 380 mi total, MPGe: 95 city / 93 highway, Battery: 16 kWh 360 V lithium-ion.

A 2012 Tesla Model S sells for $25,000-28,000. The new 2012 Tesla model S was $57,400 for the 160-mile version; $67,400 for the 230-mile version; $77,400 for the 300-mile version. It retained about 40% of its value.
A 2012 Volt sells for $8000-12000. A new 2012 volt was $40,000-46,000. It retained about 20% of its value.
A 2012 Nissan LEAF now sells for about $7000. The new price in 2012 was $36,000.

SOURCES – Tesla, InsideEVs, Gary Black, Macrotrends
Written by Brian Wang, (Brian owns shares of Tesla)

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