Morningstar - Q4 2021 - 75

Our definition of a bubble is a very simple
one: If you're using a discounted cash flow model
or some other valuation model, you'd have
to use implausible assumptions to justify today's
price. We plugged in 50% growth for 10 years
for Tesla, assumed profitability matching the best
of any automaker of any single year of the last
10 years, and we came up with a net present value
of 430 bucks. I view 50% growth as implausible.
Cathie does not. So, I view Tesla as a bubble.
Cathie does not.
Tesla is taking a leaf from Apple's book.
Cathie Wood
But two things are interesting about bubbles.
One, they can go much further and last
much longer than any skeptic would expect, so be
very careful about short-selling bubbles. The most
vivid example of that to me was the Zimbabwe
stock market in 2008. Coming into the summer, you
could have looked at Zimbabwe and said there's
hyperinflation here. This country's in trouble.
I do not want to own stocks here. In fact, I'm going
to short-sell them. But it's a crazy market. I'll be
conservative. I'll put 2% in as a short position. Well,
Zimbabwe stocks over the next six weeks rose
500-fold, which means in U.S. dollar terms, it rose
fiftyfold. You just got wiped out.
Arnott: Mean reversion is the most powerful
factor at work in the capital markets. It shows up
on earnings growth. When you have very
rapid earnings growth, it tends to mean-revert
down. When you have tanking earnings, it
tends to mean-revert up. (Not in all cases; there
are value traps.) A lot of our work is based on
long-horizon mean reversion and a recognition that
there are things you can take from the past and
things you can't. You can take from the past
measures of mean reversion. You can take from
the past measures of how fast aggregate earnings
grow relative to the macroeconomy.
It's not widely known, yet it's a simple truism,
that earnings per share for the broad market
cannot rise as fast as GDP growth on a long-term
basis. Why can't they? Because GDP growth
consists of growth in existing companies and
creation of new companies, the kinds that Cathie's
looking for. The creation of the new companies is
an enormous engine for economic growth.
But I wouldn't suggest that the pace of
innovation today is radically different from the
past. That's an area where I'm sure that
Cathie would disagree. If you go back to the start
of the Industrial Revolution, there's been
one revolution after another after another after
another. One of the most interesting things
is that the key beneficiaries of those innovations
are usually not the shareholders, but
the customers.
When you're looking at a whole spectrum of
disruptive companies, there will be some that turn
out to be spectacular. Go back to the first tech
bubble. How many of the 10 largest tech stocks by
market cap in the year 2000 outperformed the
market over the next 10 years? Zero. Not one. How
many outperformed over the next 20 years?
One, Microsoft MSFT. What about Amazon.com
AMZN and Apple? They weren't anywhere
near the top 10 back then. Apple was perceived
to be poised on the brink of ruin.
The second observation about bubbles is that
implausible growth assumptions don't mean
impossible. Amazon in 2000 would have qualified
for my definition of a bubble. Amazon was
a terrible investment in the 2000s and got it all
back with room to spare in the 2010s, when
it grew elevenfold.
To justify Tesla's current price, you'd have to
assume roughly fiftyfold growth over the next 10
years. Is that impossible? No, anything is
possible. Do you believe it's plausible? I don't.
As with Amazon in 2000, I could be proved
wrong. But as with Amazon in 2000, you might
have to wait a while for the market to catch
up to the actual growth opportunities if they are
as extravagant as Cathie says.
Wood: Tesla is not an auto manufacturer.
It's a robotics company, energy storage company,
artificial intelligence company. We have our
robotics, energy storage, and artificial intelligence
analysts focused on this stock. Or analysts
are specialists on technologies and generalists on
morningstar.com/lp/magazine
75
https://www.morningstar.com/stocks/xnas/msft/quote https://www.morningstar.com/stocks/xnas/amzn/quote https://www.morningstar.com/stocks/xnas/amzn/quote http://www.morningstar.com/lp/magazine
Morningstar - Q4 2021

Table of Contents for the Digital Edition of Morningstar - Q4 2021
