3Yr·

Ever wanted to know how inflation and rising interest rates affect a growth stock like Tesla?

I'll go into each common reason why growth stocks are punished when interest rates rise, and try to debunk some of it as it relates to Tesla.


1. inflation

Increased input prices can be well suppressed by Tesla through a dominant role in suppliers as the largest current and future e-car builder, plus they enter into long-term commodity contracts like other OEMs. Through numerous price increases since Corona, they have shown they can pass those prices on to their customers (M3 SR +21%, MY LR +14% in 2021). Higher prices could suppress demand, but this cannot be seen with Tesla as they still have long lead times and record low inventory (from 11 days down to 4 days inventory from Q4 20 to Q4 21). It was also said in the earnings call that they currently have so much demand for existing models that it doesn't make sense to pursue new lower cost models like the $25k Compact Car for now.


2. interest rate hikes

To counter inflation, central banks are expected to raise interest rates. Here, Tesla has the advantage over traditional carmakers that they have virtually no debt [Fig. 2]. This is the downfall of some companies when they have to refinance at higher costs. Tesla is net debt positive, meaning cash in the bank is higher than debt. Moreover, with $17.5B in cash and significant free cash flows each quarter (+$2.8B in Q4), they don't have the need to raise fresh money for expansion. The business is sort of self-funding, as management confirmed in their latest quarterly report: "We have sufficient liquidity to fund our product roadmap, long-term capacity expansion plans and other expenses."


3. discount factor

As interest rates rise, future earnings also become worth less, as they must be discounted more relative to the risk-free interest rate on government bonds. This makes value stocks that generate their cash flows currently and consistently in the following years worth more compared to growth stocks that will generate most of their profits only in 5 or 10 years.

DF = discount factor

Rf = risk-free interest rate (10y US Treasury note)

β = beta (Tesla approx. 2.0 [Yahoo finance])

RP = equity risk premium (approx. 5.0% [Implied Equity Risk Premiums, Aswath Damodaran])

DF = Rf + β * RP


Assume Tesla makes EPS of $100 in 2030 (as an example, doesn't matter for the calculation). Then these profits are worth different amounts at different interest rates. In the calculation, we increase interest rates from 2% to 3% (currently 1.9%).

DF1 = 2% + 2.0*5.0% = 12%

$100/1,12^9 = $36,06

DF2 = 3% + 2.0*5.0% = 13%

$100/1,13^9 = $33,29

$33,29/$36,06 - 1 = -7,7%

So in this case, a 1%P rate increase makes a -7.7% difference in today's value.


To this I can say firstly, to define volatility as risk is in my opinion bullshit, and in no way reflects the real risks of the business. Secondly, the central banks will have a hard time raising interest rates more than a few percentage points, because otherwise the countries will get into financing difficulties. Basically, inflation is very welcome to countries as a stealth tax. Third, the DF is also your return, just take a DF of at least 15% for investments, who wants to earn less?


4th Valuation

It is well known that the appropriate valuation is debatable, nevertheless the risk-free interest rate changes the valuation at which shareholders are willing to buy shares. In other words, as interest rates rise, P/E ratios fall. The correlation is not perfect, but at least there is an indication that the P/E ratios in the S&P500 decrease by ~4% when interest rates increase by 1%P [Figure1]. So for Tesla with beta 2, one can assume ~8%.

If you create an admittedly crude discounted future earnings model with this assumption, you get about -14% in present value for every 1%P in higher interest rates [Figure4].

This sounds like a lot until you realize that the 10y Treasury Yields have been in a strong downtrend for more than 30 years and in my opinion cannot stay very high for a long time [Figure3]. That would lead to completely different problems, states and economy have already adjusted too much to low interest rates. But in 10 years, of course, many things are possible.

I don't know what interest rate level the individual analysts are working with, but the average PT of the top analysts on Tipranks is $1187, if you price in there 1%P hike (-14%) you get $1020, which is still +14% from today's price of $895.


I am sure Tesla is still a good investment right now with interest rates at 2%, 3% and even 4% and am invested accordingly. NFA

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65 Comments

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Mega Post👌🏻 @ccf super elaborated and quite rationally justified. I think Tesla is more than well equipped for a bumpy market environment📊
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@simplemoney Oha thanks ✌🏻 I see also so!
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Wasn't your portfolio -5% the other day?
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@leveragegrinding I've added the correct purchase price, I hadn't really checked the portfolios at the beginning. After the Corona crisis, I was also partially long with warrants, so the value is not correct anyway.
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@svenleowe very neat.
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at $150 i'll go up ein👍🏼
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@Gaylord KGVe 13, running 😂😂
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Times a good post from you! Since you have earned in my eyes a @ccf! 👍
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@Shareholder times? They are all good... but thanks ✌🏻
A new @MelonUsk97 in serious, I like😏
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@MelonUsk97 Dojo fetzt ✌🏻
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Addition to point 2: besides their cash they actually still hold the >40 bitcoins. Surprised me tbh that they are still there
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@SharkAce They're happy to pay me dividends 🌚
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@KapriolenSonne Bitcoin dividend for every Tesla owner 🤯
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@SharkAce this time no stupid comment from you, now just do not say we will still be friends 😅✌🏻 But I'm not thrilled by the Bitcoin in the balancesheet... for this before even dilute the shareholders is not possible, if I want Bitcoin I can buy it myself
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@svenleowe I never write stupid comments :D geh mir nicht aufn sack dann geht ich dir nicht aufn sack 😂 Right. Had also rather expected that all / a part are sold. Vlt have the yes still what before who knows
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@svenleowe just read the other comments and am tbh surprised. Calm and factual remained :D Sympathetic keep it up then makes the communication more fun 🤝
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@SharkAce @svenleowe oh my bet: now kiss ;)
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@Lorena this time even fits No joke where do you always come from 😂😂
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You have made a lot of effort, first of all props for that. But because you said the other day that you don't have time to look at other companies...the length of the text says that you would have time in principle :P but I think I can't dissuade you, can I? ^^
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Yes because all the time for Tesla drauf goes 😅 and a lot of it I knew before, just had to pour it into text. But you might be on to something 🤔 with women I diversify after all....
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In days like these, Tesla is the only thing that keeps my portfolio cracking 👍🚀
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@SquirtGame is time to restructure the All-World 🤓✌🏻
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@svenleowe all World and Tesla were my only green positions in January
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@meta Aha, well founded in any case 👍🏻
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@meta jo, not expected that one makes 5 individual comments, you're still wrong 🤓
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@meta I give back the same way ;)
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@meta tesla is fair - undervalued... No investment advice!
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@meta that is not terminal growth, I use that only for the exit multiple. And look around, there are many big tech players that are still growing at 10-20%. Tesla is getting ready to convert the entire automotive sector to electric, renewing the fleet will take 20 years, there is enough growth for everyone. + Energy business and so much more. But yes, if you still think Tesla is a car manufacturer... lost
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@meta huh?? The comparison with the car manufacturers says exactly that it is not a normal car manufacturer (because no debt and much better margins) 😅 you read the post at all?
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@meta you with your confirmation bias... I have been dealing with the company for years and have already seen so many bear theses disappear into thin air, you haven't even thought up that many yet. And to refer to the high valuation of such a company as the only one is simply lost... Amazon has ALWAYS been overvalued and still continues to rise, the same will happen with Tesla.
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@MitchVlasko not only, but also. Ever seen an automaker that designs its own AI chips? Or is direct to consumer and has no dealers. Has the largest store network in the world. Can sell software options that are pure margin for $12k. Develops its own internal ERP system. Builds and controls some of the largest stationary battery systems in the world. Manages virtual home storage power plants. Working on a humanoid robot (whether or not it will ever become a reality anytime soon). It's really fascinating that there are still people who think Tesla is just a carmaker.
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