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Why Runaway Stories Get Built

May 16 2017

Professor Aswath Damodaran, based at New York University's Stern School of Business, recently participated in a Google discussion session which focused on the value of using stories in business. The discussion centered on how businesses value their stocks by having a compelling story that justifies its financial assumptions.

Professor Damodaran explained how stocks can become runaway stories, which is basically a story that investors firmly believe in. This may lead to them avoiding asking important questions about the company.

He used Tesla Inc (TSLA) as an example of a runaway story, explaining how he had written an analysis of the company in September 2013, in which he estimated Tesla's stock value to be only $67.12 per share even though it was trading at over $168 per share at that time.

He also made reference to an analysis of Tesla that was carried out several years ago in which an analyst predicted that Telsa sales would rise approximately 1.137 million units by 2026 with a margin of 7%. The Professor noted that these estimates were somewhat questionable, since the analyst had failed to account for the fact that the Tesla plant, Freemont, could not produce so many cars in that time frame. In addition, the analyst had failed to note that the cost of building additional plants had not been included in the calculations. The analyst in question eventually admitted his mistake, but Professor Damodaran cited the situation as a perfect example of people not asking the hard questions when looking at a company's bottom line.


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