Profitable investing comes from picking investments that have a future. The concept of intrinsic stock value is based on projected future cash flow. As we follow our investments and pick others an important thing to watch is company earnings. Obviously, you want your investments to be showing a profit, even growth stocks and other investments with potential for the future. But what if earnings are simply not that good? A case in point is the electric car maker, Tesla. Why invest in Tesla if it keeps losing money?
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Earnings reports are due and The Street says it is do or die for Tesla among others.
Tesla will likely take the spotlight – analysts expect the electric car manufacturer to report a loss of $3.53 per share on sales totaling $3.27 billion.
Short-sellers are making a mistake on Tesla, says TheStreet’s Tesla expert Jonas Elmerraji.
The focus right now is on production problems with Tesla’s model 3. The company needs to show investors that it can produce enough cars to generate more cash flow. And then it needs to show that it can make money once production is going well. After all, why invest in Tesla when it keeps losing money? The point is that those who are in Tesla for the long run believe that the company will fix its production problems and continue to be the rising star in the electric car market as the automotive world shifts away from the internal combustion engine. These folks believe that Tesla has a good intrinsic stock value based on their projections of future earnings.
The dictionary definition of intrinsic stock value is its fundamental value. It is obtained by adding up predicted future income of a stock and subtracting current price. It can also be seen as actual value of an equity versus its book value or market value. The concept of fundamental analysis of equities evolved from this concept. Using fundamental analysis the intrinsic value of a stock is the expected company cash flow discounted to current dollars. It is a discounted cash flow valuation. An inherent weakness in this concept is that too often the medium and long term prospects of a company and its stock price are not clear. So, what is intrinsic stock value of a company if the future is uncertain? The ability to see into the future to see how well a company will manage its assets, products, costs, R&D, and marketing is of utmost importance in calculating intrinsic stock value as a means of deciding whether or not to purchase a stock.
In short, if you are a long term Tesla investor you believe that the company will figure out its production issues, start making money, and be a cash cow into the far distant future. If you are a doubter, as many have been for the last 8 years, you will sell now in the belief that the company will simply keep losing money. This is the crux of using intrinsic value as a guide in investing. You need to accurately predict who will be making money in the future based on current evidence.