When a company with a sky-high P/E multiple misses the quarter or guides lower, the stock typically gets hit with a double whammy as future earnings estimates are cut, and the stock’s P/E gets re-rated downward. That’s why stocks like $Sweetgreen(SG.US) last week and $Cava(CAVA.US) today fell 20-25% on modest compband guidance misses, and it’s why we tend to avoid stocks with P/Es of 100x or higher since there’s really no room for error.
A stock’s P/E is the present value of all future cash flows discounted back to the present, less net debt, divided by the share count, and divided by next year’s Adj EPS. P/E are a function of the duration and magnitude of the future growth rates, as well as long-term interest rates and the stock’s beta relative to the market. If a company could sustain 30-40% earnings growth rate for 30 years, it could easily command a 150-200x P/E. Unfortunately in most cases, success attracts competitive forces which reduce the duration and magnitude of a company’s “super growth”, which reduces its P/E. We view TSLA as an attractive long-term investment. We see Tesla EVs as the best EV products on the market and offering the best value for the money. We believe the company’s back-to-back years of EV delivery declines (2024 -1.1% YoY, 2025 -10% YoY) will reverse in 2026, as cheaper more affordable TSLA models are released, and as TSLA unsupervised FSD autonomy sells more Tesla EVs once TSLA attests to regulators that FSD is at SAE Level 4, upon which they would assume liability for injuries and damages rather than the driver. Our issue with TSLA is that our assessment of valuation is below its current price. We value TSLA at $310, based on our 2030 EPS forecast of $12.50 (vs $8.75 est), and a $550 terminal value assuming a 2030 P/E/G of 1.75x and forward long-term earnings growth of 25%, discounted back at a 13.6% cost of equity (4% 10yrTY, 6% equity risk premium, 1.6x beta). Math: ($12.50 EPS x 1.75x 25%)/ (1.136^4.5) = $310. Our most controversial assumption is that our value contribution from autonomous ride hailing is just 15%, given that TSLA is just now rolling out unsupervised autonomous ride hailing and there are five formidable autonomous ride-hailing competitors (Waymo, ZOOX, Baidu,The copyright of this article belongs to the original author/organization.
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