Last week I made a post about Tesla, pointing out that it’s valued by the stock market to be worth more than Toyota, Ford, GM, and Damiler combined, yet sells 61X fewer cars than those companies. Many fans of Tesla blew me up in the comments pointing out my ignorance that “Tesla isn’t a car company!” despite 94% of their revenue coming from selling cars.‎
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Ok, true. Fair enough. Tesla is a tech company. Or an energy company. Or an innovation company. Or a flamethrower company. Or whatever you want it to be. But no matter what it is or what it will be, there’s still some cold hard math behind what things are worth. There are some quick and dirty ways to value a company. One is based on a multiple of profit (Let’s say 7X). That would value Tesla at $25B. Another is on a multiple of revenue (Let’s say 2X). That would value Tesla at $50B. Currently the stock market is valuing Tesla at about $450B, making it the 7th largest company in the US.‎
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Clearly, there’s some speculation and expectations built into that number. That brings us to the envelopes. So EVEN IF you think Tesla has huge growth potential ahead (I certainly do) and even IF you think Tesla is the future of the car/tech/energy/innovation/flamethrowing market. You still need to decide HOW MUCH it might be worth in the future. HOW LONG that will take. And what you’re willing to PAY for that today. For some context, a year ago Tesla was trading at 1/10th of what it is today. Did Tesla become 10X more valuable in the last year? Is Tesla still undervalued? Would you pay 10X more for a share today? 100X more? Is someone going to pay you even more than that to buy the share later?‎
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The answer to all of the above questions, of course, is “I have no idea.” And frankly, neither do you. So the solution is simple. The wise, confident, experienced, and disciplined investor knows better than to get into the speculation game. This investor buys and holds index funds to guarantee her fair share of all market growth, no matter what Tesla or any other company does in the future.‎
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-Jeremy‎
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