Would you pay an 11 PE for Tesla stock? Why not, right? Ford and GM trade at low multiples. But Tesla’s about to have blowout earnings growth starting in Q3 as per their guidance.

We’re at about $27.00 in earnings for 2019 when factoring in 1) the gross margin ramp they saw in S&X in Q2, 2) their Model 3 unit plans through 2019 and, 3) the company’s gross margin targets for Model 3 which Musk reviewed on Q1 and Q2 earnings calls.

The stock price of $295 divided by our $27 gives you an 11 PE. Not bad, right, for one of the best earnings stories that exist today.

Two things that most did not notice but should have last quarter was the huge jump in S&X gross margins in Q2. They were up about 1000 basis points. They reached into the high-30s. That gives you some visibility that Model 3 margins also have upside.

Again, high-30s% gross margins for a car company? That’s not huge?

BMW and Mercedes are about 20% while the US manufacturers are lower.

Musk’s focus on the machine being the production was proven out in that high-30s number for S&X. But you needed to back into that number, they didn’t outright say it. And who would want to go through that one extra step to try and figure that out? It’s probably the most important piece of their Q2 report.

Units are hitting the steep part of the S-curve Elon Musk has waiting for for some time. That steep part of the S-curve is causing blowout gross margins company wide.

You have too many bears rear-view mirroring it while earnings are about to explode starting this quarter, potentially.

In our experience what drives a PE are inventory turns and gross margins. The higher both are the more a dollar of investment can turn over so that dollar, so to speak, is worth more. That gives you a higher PE.

So we think Tesla’s PE should be closer to 50X, not 10X given its market leading gross margins. If they ever decide to drop price their competitors are toast. Also what traditional manufacturer is going to want to mess up their earnings by scaling EV losses that Tesla now has behind them? It’s not an easy business decision.

Much like Netflix and Amazon spending big first, others are left to play catch-up but never really catch up.

50 X our 2019 $27 = $1350. That would be nice, right? (Street’s at about $2.90 for 2019)