Introduction I haven't updated in a long time. This is partly because other things in my life have taken priority over Tesla, but also because My Tesla Investment Thesis 3 still speaks for itself, and I expect it will for the foreseeable future. It's unlikely that anything will change about Tesla's long-term outlook, until perhaps we see more specifics surrounding AMaaS' exact business model, financials, and rollout that will allow me to make more precise predictions, or until there is more clarity surrounding Tesla Bot's potential, business model, timeline, and financials. At the end of that blog post I noted three things I'll be paying attention to going forward: Big changes to Tesla's future outlook that change my long-term outlook on the stock. Options opportunities to take advantage of. A stock price of $3,000 (pre-split, so now $1,000). Based on the research in that blog I decided I would no longer be 100% TSLA at that price, but instead I'd be 99% TSLA and probably ~1% cash, just to make sure I don't lose everything in the very unlikely event that TSLA goes to $0. Before the stock reaches $1,000, in my opinion it is too costly not to be 100% invested in TSLA given my personal goals. Thing #1 is of course in order to make sure nothing happens to my long-term thesis on the company. If something material changes, I might want to change my portfolio composition earlier and/or to a larger extent. And thing #2 is part of my personal investment strategy I laid out in the post called My TSLA Investment Strategy. This post's purpose is to take a close look at TSLA's outlook for the next two years and the attractiveness of Jan'25 call options, because TSLA is currently trading at a two year low. Table of Contents: Tesla in 2023 and 2024A look at Tesla's fundamentals over the next two years. Macro-Economic OutlookA discussion of what the global economy may look like two years from now. Stock Price PredictionsPredictions for where TSLA will be at two years from now. Attractiveness of Call OptionsAn evaluation of TSLA Jan'25 Call Options. DisclaimersA summary of my recent options trades and some warnings. Conclusion If you are not familiar with this kind of post of mine about TSLA options, please first read My TSLA Investment Strategy, or at least the final section of that blog. You will not properly understand parts of this blog without what I've written there. 1) Tesla in 2023 and 2024 As usual, I've painted more than one scenario. This time I have a base case, a bear case, and a bull case. Since we are considering the attractiveness of Jan'25 options, we'll be looking at Q2'24 and Q3'24 financial results, because we need a window to be able to sell the options. Here are the spreadsheets: Bear PDF Bear Excel Bear Numbers Base PDF Base Excel Base Numbers Bull PDF Bull Excel Bull Numbers I believe the most difficult thing to forecast is Tesla's margins throughout what is likely to be a recession. I have little doubt that Tesla can sell every vehicle it makes, which makes the company fairly recession proof, but the question is how much margins will suffer. It helps a lot that each day that passes more and more people want to buy EVs, which are probably going to remain supply constrained for the next decade or so. In my opinion, the three biggest influences on Tesla's margins will be: New US EV tax credit Price cuts to match demand with increasing supply Cost savings (4680s, castings, structural battery, lower commodoty prices) I've modeled these as follows. I have increased prices in Q1'23 in each model to account for the US EV tax credit. Tax credit will be $7,500, but I'm assuming a conservative $5k price cut in the US. So I've increased the price of MS+X by $2,500 (assuming 50% of volume goes to US), and by $2k for M3+Y, because so far this year about 40% of volume has gone to the US. To simplify, I've modeled any and all price cuts in Q2'23. The amount differs in each case. I'll talk about these in more detail later. To simplify, I've modeled all cost savings in Q3'23. I've kept these modest between $500-1k per vehicle, so between 1.5-3.5% of overall vehicle cost. Please do not pay too much attention to the next few quarters. My focus in these spreadsheets was to as accurately as possible forecast Q2'24 and Q3'24, not to get the next couple of quarters exactly right. Now, let's discuss the base case first. Base Case TTM GAAP EPS in the second half of 2024 is ~$8 in this base case. Deliveries in Q3'24 consist of 22k MSX, 705k M3Y, 80k CT, 7.5k Semi. Price cut in Q2'23 brings the ASP to a little above Q1'21, before all the price increases began. This excludes MSX, CT, and Semi, because Q1'21 was almost entirely M3Y and a majority M3. If I accounted for the fact that the mix is currently skewed more towards MY, ASPs would be practically the same as Q1'21. I have not modeled in much energy growth, because we've seen very little over the past two years in spite of solar roof promises, so I'll model it in once Tesla actually starts delivering. Besides, even significant energy growth won't contribute much to the bottom line in comparison to automotive anyway. But I do expect energy to do better than this, so it adds in a very small margin of error, which I like when my purpose is to evaluate options. You can browse through (or even adjust) the model yourself if you'd like and look at it in more detail. But I'm going to move on to the bear case now. Bear Case TTM GAAP EPS in the second half of 2024 is ~$6 in this bear case. Deliveries are practically the same as in the base case. Besides a slightly smaller price increase from the US EV tax credit, the only difference here is lower margins in the form of larger price cuts and a slightly bigger increase in OPEX. The ASP in this bear case drops well below what it was in Q1'21 before the price increases started (again excl. MSX, CT, Semi). So considering that in Q1'21 the cheaper M3 outsold the MY more than 2-to-1, and now the more expensive MY outsells the M3 more than 2-to-1, this means prices would drop well below what they were in Q1'21. As a result, revenues are a little lower. But most significantly, auto sales excl. credits margin is 24% instead of 28% in the base case, and overall operating margin is 16% compared to 20% in the base case. I suppose it is possible that it could get worse than this, but I'd be surprised. I generally err on the side of caution when looking at options, so this model is in my opinion bearish/conservative in a number of ways. Let's move on to the bull case. Bull Case TTM GAAP EPS in the second half of 2024 is ~$9.5 in this bull case. Deliveries in Q3'24 consist of 25k MSX, 705k M3Y, 140k CT (2 factories), 10k Semi. There are a few differences compared to the base case: Higher deliveries (mostly CT). Marginally lower MY price cut and slightly higher MY cost reduction, resulting in slightly higher MY margin. Higher CT margin and higher Semi margin. Negligibly higher energy revenue + profit. It's easily summed up as slightly higher deliveries and slightly higher margins. Auto margins are 29.5% vs 28%, and operating margin is 21.5% vs 20%. Total deliveries are 880k vs 815k. I think there are some people out there with much more bullish predictions, but this is what I'm comfortable with right now, and I am erring on the side of caution because I am using these forecasts to evaluate options. Conclusion In the second half of 2024, Tesla's TTM EPS will most likely be somewhere between $6 and $9.5. Probably in the middle around $8. It is possible, but unlikely, that EPS will be <$6. It is also possible that EPS will be >$9.5, but not super likely. 2) Macro-Economic Outlook The macro-economy is what has been the story of TSLA (and rest of the stock market) over the past year or so. All valuations worldwide of any investment start with the 'risk-free rate' (USD interest rate), so when that goes up from 0.25% to 4% with expectations to rise further to 5%, valuations of investments will crater across the board with no exceptions that I am aware of. https://www.macrotrends.net/2577/sp-500-pe-ratio-price-to-earnings-chart https://ycharts.com/companies/TSLA/pe_ratio Because of this correlation between the interest rate and investment valuations (and Tesla's valuation), it'd be great if we could know or forecast the interest rate (and interest rate outlook because markets are forward looking) two years from now, to help us with making stock price predictions. However, in my opinion this is near impossible because of how many factors influence the global economy. Being a true expert, who may have an edge in understanding the likelihood of all possible outcomes, in just a few of these factors requires a tremendous amount of study and is pretty much a full-time job. But there are so many factors at play that it is in my opinion impossible to predict the global economy's future with much certainty. Just a few examples of these numerous factors are: Ukraine war China/Taiwan uncertainty China's economy, which in and of itself consists of countless sub-factors Europe's economy, which is also driven by a lot of sub-factors Europe's energy crisis Europe's inflation, which is driven by many sub-factors US' inflation, which is driven by many sub-factors US politics, and politics of every single other country, especially the ones with big economics like China/EU where policy changes can materially impact the global economy Oil prices Every single smaller non-US/China/EU economy, although these are obviously smaller factors Job market Housing market Supply chains, which played a large role immediately post-COVID Geo-politics, which consists of every relation between every individual nation Crypto market, which is huge with many players. Look at the effect FTX's collapse had not only on the crypto market, but also on stock markets. Debt markets Overleveraged entities. Big part of, if not the cause of, the '08 financial crisis were overleveraged investment banks becoming insolvent. Recently, the UK almost went belly up due to overleveraged pension funds Social unrest/movements. The great resignation and lower labor force participation has influenced economies post-COVID Low birth rates, aging populations, and possible population collapse are undoubtedly going to influence economies at some point this century I can keep going, but I think you get the point. It's impossible to be an expert on all of this and precisely predict where the economy will be in the future. However, I do believe that having a general understanding of what is going on can serve as context to investment decisions that are for the most part based on fundamentals. Part of why I went 100% common stock immediately post-S&P inclusion is because of the low interest rates. Interest rates could not go any lower, so there was only downside in terms of interest rates' impact on the stock market. I realised that although interest rates may not go up immediately, sooner or later they will. It was a risk I kept in the back of my mind. As of right now, I hold a somewhat opposite opinion of the one I held at the end of 2020. It is definitely possible that interest rates will go up further from what is currently looking like a FED terminal fund rate of ~5%, but looking at two years from now, I think there is a good chance that the interest rate will be lower than it is now resulting in higher valuations. Or if it isn't, I definitely think it is more likely than not that the interest rate outlook will be that interest rates are going to come down. Note that I say "more likely than not", meaning there is in my opinion a >50% chance that, if interest rates aren't lower already, at least interest rate outlook will be better than it is now. And given that markets are forward looking... you know the drill. Higher valuations. I think I'm far from the only one who has this opinion. It seems to me that the general consensus right now is that interest rates will go up to ~5%, worst case 6% or 7%. That this then will cause a pretty bad recession lasting for at least all of 2023, possibly a lot of 2024 as well. But, whether something breaks (a la UK pension funds) and the FED will have to rapidly lower interest rates some time next year or whether high interest rates will stay for a while and the FED lowers rates in 2024 or even 2025 is up in the air. This seems to me to be the general consensus and the market's expectation right now. But, as I just explained, one cannot predict the economy's future with certainty, so although it seems extremely unlikely (<1%) to me, we cannot rule out 10% interest rates. We also cannot rule out an unforeseen recession so bad that it lasts many more years, nor a scenario where both inflation and interest rates simply stay elevated for many years to come. Lastly, I'd like to bring attention to a somewhat contrarian opinion, the opinion of Cathy Wood. Her ARK funds have performed terribly, which is not surprising because they're invested in high-growth and most high-growth stocks have been hammered just as badly as ARK's funds. I also think she may suffer from confirmation bias at times and (like a lot of entrepreneurs) may not be entirely objective when it comes to her investments. Cathy may not have been right about everything (inflation = transitory, oil <$80), but she has been right about some things (V-shape COVID recovery, TSLA). She is also obviously an incredibly smart individual who understands macro-economics a lot better than 99.99% of the population. She still believes strongly that deflation is a bigger near-term risk than inflation and points to inventories piling up and commodity prices falling as two of many indicators to back this up. She also believes that we might see a big economic boom once we get out of this, similar to what happened in the 1920s. She may or may not turn out to be right about these things, but even if she is only 10% or 20% right, that would mean both inflation and interest rates will come down fairly soon. 3) Stock Price Predictions Valuations PDF Valuations Excel Valuations Numbers This is a table that I update every now and then. It contains a lot of data on revenue, earnings, EBIT, etc. of about a dozen companies, and then computes these companies' valuations and growth rates. There are many ways to value companies and I can't say that any method is always the best, but for the purpose of this blog I will be looking mainly at TTM P/E Ratio, Forward P/E Ratio based on analyst estimates, and Expected Revenue Growth Rate based on analyst estimates. If you're wondering why I use analyst estimates, which are often wrong, that is because we want to know what Wall Street / the market is looking at. If everybody on Wall Street looked at Tesla the way I do, it would probably be a ~$2,000 stock. Looking at the table, we can see that the market currently values TSLA, which is expected to grow revenues >50% from now to Q4'23, at 32x 2023 EPS. At the same time, it values NVDA, which is expected to grow revenues <5%, at 36x 2023 EPS. And, it values NFLX, which is expected to grow revenues <10%, at 28x 2023 EPS. I am ignoring AMZN on purpose, because RIVN gains and losses are affecting its earnings, and I am unsure as to what extent they are affecting analyst forecasts. But in short, Tesla is valued on the upper end of large tech companies, in spite of being a GIGANTIC outlier in terms of growth. Furthermore, Tesla is sitting on a large pile of cash that should grow to >$50B by the end of 2024 even in a bear case, and that may grow to as much as $80B in a bull case. It is not a risky growth business at risk of going out of business and/or reliant on expensive additional capital injections. Therefore, I don't think Tesla's current valuation will last very long. It is objectively severely undervalued compared to other stocks. As it currently stands, I'd say that something like 65-75x TTM and 45-50x forward P/E is more reasonable in comparison to other large tech companies. As is, there is a big disconnect between reality and the market's expectations. The market is either asleep or it's expecting Tesla to basically stop growing after 2023, or operating margin to crash from ~16% to ~10% rather than go up to ~20%. I doubt that this will last for more than a couple of months, or perhaps a few quarters at most, but let's see. Before we look at what this means for the stock price in two years from now, don't mistake this to mean that I am ruling out that the stock goes down or stays flat in the near term. I am talking about valuation relative to other large tech companies, not about stock price. If macros deteriorate further in the near term, even if Tesla's relative valuation normalizes, the stock may stay flat or go down more. Okay, so my expectations for TTM EPS towards the end of 2024 are: Realistic bear case of ~$6 Base case of ~$8 Bull case of ~$9.5 Similarly, I have a bear, base, and bull case for where I expect TTM P/E Ratio to be at: Bear case of 50x Base case of 75x Bull case of 100x I am slightly less confident about these than my EPS projections. These are also purposely on the conservative side, because I prefer to build in a margin of error when considering options trades. I am also using slightly lower GAAP EPS projections, even though Wall Street looks at Non-GAAP EPS, which further builds in a slight margin of error. My reasoning is basically what I've talked about in the previous section on the macro-economic outlook. Barring some highly unlikely 10% interest rate climate with no indications that it's going down, I would be shocked if Tesla is valued for long at much less than 50x TTM EPS. It can happen, but I'm good with this as a realistic bear case. More likely, Tesla's relative valuation will be more reasonable and the macro-economic outlook will be at least slightly better, for a base case of 75x. If interest rates are down or are expected to go down significantly two years from now, I could easily see 100x TTM EPS. So, my stock price predictions are: Bear case of ~$300 Base case of ~$600 Bull case of ~$950 That's a huge range, but there is a lot of uncertainty in terms of the economy over the next few years, interest rates outlook two years from now, and Tesla's margins in 2023 and 2024. One final thing I will mention is FSD. Tesla is making a lot of progress, and although I don't expect a massive amount of Robotaxis to be contributing to Tesla's bottom line two years from now, I think there is a decent non-0% chance that the market will start to realise Tesla's lead in this arena. If Tesla continues to make significant progress on FSD over the next 12-18 months, maybe decides to publish official disengagement statistics, and perhaps even has a few operating robotaxis with certain restrictions, that may be enough to get the market to pay attention and assign some value to this tremendous potential. This is not a certainty by any means, but I'd say there's a 10-20% chance of the market adding a few hundred billion dollars in market cap to TSLA because of FSD's potential, which could add an extra $100-200 to the stock price. 4) Attractiveness of Call Options Options Analysis PDF Options Analysis Excel Options Analysis Numbers Naked Jan'25 Call Options Jan'25 Call Option Spreads Looking at these tables, it is clear to me that, unlike at the end of last year, spreads are not attractive right now in comparison to naked calls. I've purposely erred on the side of caution in my predictions, and if the stock price even gets close to my bull predictions, naked calls will outperform spreads, let alone if the stock somehow surpasses those predictions. This is particularly extreme with the ITM calls, because a $100-610 spread will be less profitable than common stock if the stock price reaches my bull case. And the $150-610 spread will quickly go to breakeven. None of this should come as a huge surprise, because the $610 call is dirt cheap trading at $8.90. As for the naked call options, the $200s stand out to me, because these calls will break even even in my bear case of $300 and they still hold >50% of their value @ $250. If the stock is $250 ~6 months before expiration, the $200s would probably be close to break even actually, because there would still be significant time-value (theta) left. So these $200s seem to have very low down-side to me. The $400s also look interesting, because they'll still break even around $450 upon expiration, or a little above $400 1-2 quarters before expiration when accounting for theta. So although the risk is a little higher, pay-offs are about double to triple that of the $200 calls (184% vs 98% ROI @ $600 and 393% vs 134% ROI @ $950). So let's examine these a bit more closely: Naked Call Zoom 1 This isn't an exact science, but to me the $200s look ideal. Something like the $240s will offer slightly better returns, but I really like the low downside of the $200s and that they even hold value pretty well if the stock is somehow only $250. Naked Call Zoom 2 Out of these, I'd pick the $370s. They perform the best at my base case of $600, and they don't lose out on too much compared to higher strikes if the stock ends up being higher. The $370s also have a lot less downside and still hold decent value @ $400 upon expiration. And 1-2 quarters before expiration, they should still be worth an okay amount around $350 even. So as long as not everything goes to shit, one shouldn't go broke on these calls. Finally, I want to briefly discuss naked $600 calls. Their break even point is pretty much my base case, which means they carry a lot of risk, but they also carry a lot of upside for a number of reasons. Not only will these call options outperform anything else if my bull case comes to fruition, I think there is a much higher chance of my bull case being too bearish than my bear case being too bullish. I really would be very surprised if the stock is <$300 two years from now and I think unexpected things will have to happen for that to become reality. However, I don't think anything quite as unexpected will have to happen for the stock to go >$950. If the macro-economic outlook improves and Tesla executes well and reaches ~$9 EPS, a little bit of market exuberance, a particularly positive 2025 outlook, and/or a bit of a push from the options market in terms of delta hedging could easily push the stock beyond $950, and let's not even talk about what would happen if interest rates go back to zero. All of this adds onto why I do not like TSLA call option spreads right now.Lastly, if there is a near-term big spike in TSLA stock price, to say $400 after Q4 or Q1 earnings (not impossible imo). I personally would at the very least deleverage, potentially go so far as to go back to holding 100% TSLA common stock. In this scenario, $600s will vastly outperform any other call option due to the higher delta. Of course $600s will vastly underperform any other call option if the stock drops in the near term, but personally I'd plan to hold through that. I'm not trying to say here that $600s are a great buy. I don't own any, and currently don't plan to get any, because they are somewhat high risk. But I can definitely see an argument for them right now, and they may be right for people with certain goals. If you are considering buying TSLA options, make sure to look at how it would impact your portfolio in various outcomes. I described how I do this in My TSLA Investment Strategy. Also, if you plan to use any of the information laid out in this blog, make sure to read this next section first. 5) Disclaimers If you have read any of my previous option blogs, you should already know that options are extremely risky and not for everyone. I may have done very well on a lot of my past option trades, I do not have a flawless track record: I've lost on pretty much every short-term option trade I've ever made. Fortunately they were tiny (<1% of portfolio) and I stopped doing them as soon as I realised I cannot predict with much accuracy what the market will do in the next few weeks or months. The only exception to this was Tesla's S&P inclusion, when I had researched what would happen at a fundamental level for about a year, and I was highly confident short-term options would be profitable. As you may remember, I bought some options in August of 2021, which I talked about in My Tesla Investment Thesis 3. I also bought call spreads that I discussed in this post at the end of last year. I then bought more call spreads when the stock dropped further at the beginning of 2022.I sold all of these in July-September of this year when the stock was $250-325. Because these were mostly spreads, I fortunately enough barely lost anything on them, but obviously I did not foresee the crash that happened this year, so I feel like I got away lucky. It's not like I used margin or risked the financial freedom TSLA has afforded me, but had I bought naked calls instead of spreads, I would've lost a non-negligible portion of my shares. I have already been accumulating Jan'25s since they were released in mid-September. I converted the last remainder of my Jun'23 calls and Jan'24 spreads to Jan'25 calls when the stock was >$300. I then added more when the stock was $245, $215, and as recently as $185. I am not worried about any of these options I've bought, but I am at the very least far from perfect at timing the market, perhaps even bad at it. So, feel free to use any information and data from this blog, but some of it may be wrong (I am human), and be sure you understand the reasoning behind everything, and make your own decisions. Everybody has different goals (as I discussed in My TSLA Investment Strategy), and so options are not for everyone. TSLA common stock is a great investment that's hard to go wrong with, and even TSLA is not right for everyone. Last but not least, knowing when to sell options is as important as knowing when to buy them. The next year in particular has the potential to be quite volatile in terms of macro. I expect Tesla to have a quarter with ~$1.5 EPS in one of the next two quarters, which is halfway from where it is today (~$1) to where I expect it to be two years from now (~$2). Although I am not going to bet on TSLA going up in the next 1-2 quarters, if it does I may not hold onto my Jan'25 options for two years, or even one year. Conclusion TSLA is clearly undervalued right now in comparison to other large tech stocks. Something will have to give at some point. Whether that means TSLA will go on a run soon, or whether macros deteriorate and keep TSLA steady, or whether macros deteriorate before TSLA's relative undervaluation is corrected driving the stock even lower, I cannot predict. However, TSLA as a stock is a great buy right now. I personally would not hesitate to invest at this level, if I wanted to own TSLA but was waiting on the sidelines. It could certainly drop another 20-30%, but that's a gamble in my opinion and the long-term (10-15 year) outlook is as good as ever. Tesla is still on track to be the biggest car company, to solve FSD and dominate AMaaS, and Tesla Bot is a hell of a 'what-if' to have included in the investment. Please leave a comment or reply here or on Twitter if you have any feedback or a completely different view. Constructive feedback and disagreements are what helps everybody become less wrong. So they are much appreciated. I once again may not post for a long time. There is one topic which I am considering researching and perhaps writing about. But there are other important things in my life that I've been prioritizing, so we'll see. I hope you enjoyed reading this, Frank

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