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Gary Black

15 Dec, 10 tweets, 3 min read

Open letter to all S&P 500 benchmarked managers:

On Friday 12/18 at market close, $TSLA will enter the S&P 500 Index at an approximate 1.5% weight - the sixth largest weight in the S&P 500 index after $AAPL, $MSFT, $AMZN, $GOOGL, and $FB.

2/Goldman says 90% of you don’t own $TSLA, and you probably never had much interest in owning it, since it trades at 169x consensus 2021 EPS, and is +665% YTD. Surely you can ignore it for a little longer, and wait for it to come back down to Earth.

That would be a huge mistake.

3/ CNBC talking heads who know nothing about $TSLA have long proclaimed it to be overvalued. Celebrity shorts and sell side analysts who blindly compare it to other auto companies have been wrong about TSLA for years. Investors who I think are smart sound like empty suits...

4/ when they try to explain why $TSLA keeps going up.

I’ll tell you why $TSLA keeps going up, and why it could double again in 2021 (at 1.5% wt, a double will cost you 150 bp performance).

First, EVs will soon replace gas-powered cars, yet EVs today are just 3% of global SAAR.

5/ As with IPhone, once a customer goes EV, he/she never goes back. By 2025, EVs are likely to be 20% of global SAAR. Do the math: 20/3 = 6.7x = 46% CAGR.

Second, $TSLA is by far the global EV market leader, with 25% YTD global EV share. TSLA continues to grow its share...

6/ because $TSLA keeps increasing its TAM. The Y CUV almost tripled US TAM from 24% to 65%; in 2021, the Cybertruck iwill expand it to 86%. Like iPhone, ICE-brand EVs can’t compete with TSLA’s iconic brand, battery range, power, FSD/software, and cost. And ICE-brands are tainted.

7/ Valuation: This is where normally smart people get off track. With $TSLA vols and EPS growing by 50%+ per year, no portfolio mgr would put a auto mfr P/E of 8-10x on TSLA. If one looks at 2022/2023, my P/Es are 67x 2022 EPS and 43x 2023 EPS. That’s a 2022 PEG of 1.3x.

8/ There are no mega cap growth companies forecasted to grow by 50%+ per year trading at $TSLA ‘s 1.3X 2022 PEG. FB has the cheapest PEG at 1.1x; AMZN and GOOG are both at 1.3x, but all with lower growth. R1000G trades at 2x forward growth. S&P 500 trades at 3x forward growth.

9/ What is $TSLA worth? With an 2025 EV adoption rate of 20% and assuming TSLA holds its 25% EV share, with lower ASP, and no Reg Credits, I get 2025 EPS of $24. At a 50x P/E (2x PEG), that’s $1,200 by 2025. At a 9.5% disct rate, that’s $830. With a 100x P/E, both values double.

10/ Between now and Friday 12/18 at the close, the trade for S&P index funds will be: Buy $TSLA, sell everything else in the S&P 500 benchmark.

You might want to think about doing the same. Then you can sleep at night, knowing that holding TSLA at a 1.5% weight can’t hurt you.

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More from @garyblack00

Gary Black

@garyblack00

14 Dec

Normally smart investors say the dumbest things when talking about $TSLA:

“Tesla has a P/E ratio of 1,220 times trailing earnings, when 10 to 20 is more typical for profitable automakers.”

First, no sophisticated investor would value TSLA, growing volumes at 40-50% per yr...

2/ at P/E ratios of legacy auto makers, which aren’t growing. Comparing $TSLA to legacy auto makers isn’t the issue. Putting the same P/E on TSLA with 40-50% growth as companies growing at zero makes no sense.

Second, using backward looking P/E ratios to value a company with..

3/ a long growth runway, expanding TAM, and unlevered brand is at odds with theory, since $TSLA value is in the tail. That short-term mindset caused investors to miss $AMZN, $FB, and other fast growers. The proper way to value growth stocks: Discount the value of future earnings.

Read 4 tweets

Gary Black

@garyblack00

13 Dec

I found this WSJ article about $YHOO’s entry to the S&P 500 from 12/8/99. Parallels vs $TSLA are striking: YHOO was a new entry to S&P 500 (not a step up), institutions’ widespread skepticism to YHOO given 1,000x+ P/E, very loyal retail investor base, first internet entry to S&P.

2/ Yahoo soared 63% betw 11/30/99 announcement and 12/8/99 inclusion, including stunning 24% on 12/7, the last day before inclusion. +63% would put $TSLA at $665. YHOO kept increasing after inclusion and only collapsed with other tech stocks in 2000 as the internet bubble burst.

3/ What’s changed vs 1999:
1) S&P index funds/ETFs were only 3% of S&P mkt cap of $12.0T.
2) YHOO went into S&P at ~0.5% float-adj wt vs $TSLA 1.5% wt.
3) Hedge funds were $200B total AUM in 1999 vs $3.3T today.
4) Trading commissions have collapsed from $.05/sh to zero today.

Read 4 tweets

Gary Black

@garyblack00

12 Dec

Next week will be volatile. I’m sticking with my previous expectation of a $650-$690 $TSLA top and then a 10-20% correction, but those ests could be too high or too low. No one knows how many shares are in the hands of speculators waiting to sell to indexers who need 130M shares.

2/ Friday’s action was not a good indicator, with $TSLA getting slammed repeatedly, most likely from institutional sellers of the 8M ATM shares bought at a discount last week. Index shops will likely give PMs lots of flexibility to buy TSLA shares earlier than the usual 2-3 days.

3/ Speculators have been buying $TSLA since 11/16 in the hope of exploiting the indexers who need to buy 130M shares. TSLA is up 50% since 11/16, but indexers need just 17% of TSLA float. Hopefully, some of the buying was by $8T in active mgrs, who would likely hold their shares.

Read 4 tweets

Gary Black

@garyblack00

8 Dec

According to S3 Partners, $TSLA shorts have lost $35B in 2020. I talk with many TSLA shorts, and have been on the other side of their trade all year. Here is where $TSLAQ got it wrong: Way under-estimating TSLA TAM, and in thinking ICE-branded EV launches would hurt TSLA.

2/ Street estimates are soaring. $TSLA 2020 and 2021 EPS ests have almost doubled this year, as Y has quickly become TSLA ‘s best selling model with less than 20% cannibaliz’n of M3. Model Y is now being taken global. Meanwhile, China volumes will be 50% of TSLA volume in 2021.

3/ When I argued with shorts about Model Y, they missed that Y was a small SUV and M3 was a small sedan. The two don’t compete. And yet, shorts would argue Y would massively cannibalize M3. Y more than doubled $TSLA ‘s US TAM, from 25% to 66%, and will do the same globally.

Read 10 tweets

Gary Black

@garyblack00

5 Dec

Indexers need to buy ~120M $TSLA shares before 12/21. They will likely buy them Wed-Fri 12/16-12/18. Indexers can’t buy early because it could lead to dispersion (deviation from bm). There is no way of knowing how many TSLA shares traders have bought in front of indexers.

2/ We do know $TSLA has run up 47% since announcement vs 16% of float needed by indexers. On avg, 49M TSLA shares have traded per day since S&P announced. In the 10 days pre-announcement, 27M shares traded per day. Over 13 days, that’s 290M extra shares.

3/ No one knows how many shares were sold multiple times the last two weeks by traders. We don’t know how many of these $TSLA shares traded will be made available to indexers between 12/16-12/18. We know indexers need 120M shares. There are still 7 more days of potential buying.

Read 4 tweets

Gary Black

@garyblack00

4 Dec

Raising my $TSLA PT to $830 from $720, reflecting increase in TSLA EV share from 22% to 25%.

Oct YTD TSLA share now 25% vs 17% in FY’19, despite slew of new EV offerings.

$830 PT over 6-12 mos reflects FY’25 EPS of $24 (was $21) @ 50x P/E = $1,200, disct’d back @ 9.5% = $830.

2/ At $590, $TSLA underpriced at 62x FY’22 EPS $9.50 (Street $5.40), and 40x FY’23 EPS $14.80 (Street $5.95) with 50%+ 5-yr vol and EPS growth. At 1.2x FY’22 PEG, only mega-cap growth name cheaper than TSLA is $FB at 1.1x PEG (avg R1G PEG 2.0x). At $830 PT, TSLA has +40% upside.

3/ My new $TSLA non-GAAP EPS:
FY’20: $2.50 (no chg)
FY’21: $4.80 (no chg)
FY’22: $9.50 (vs $8.70)
FY’23: $14.80 (vs $13.00)
FY’24: $19.70 (vs $16.60)
FY’25: $24.00 (vs $21.00)

My new TSLA FY’25 delivs are 4,000K vs 3,520K prior (equal to 5.0% overall SOM vs 4.4% prior)

Read 7 tweets

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