In a blindfold take a look at, what would traders consider Tesla?

In a blindfold test, what would investors think of Tesla?

Think about {that a} billionaire worth investor needs to point out that Wall Avenue cash managers are swayed extra by glamor and group-think than the rooting out bargains. Say this fellow, whom we’ll name Mister Waldorf for his walrus mustache and old-school method, invitations half of dozen of those hotshots to lunch at his stuffy non-public membership requiring jackets and ties, asks them to take a short examination for a thriller enterprise he calls “Blindfold Inc.”

On Mister Waldorf’s course, the traders all decline cocktails, and after lunch, their host arms them a one web page abstract for an unnamed firm that he identifies solely as a fast-grower and grasp of modern know-how. “My associates,” intones Waldorf, “please research these numbers for 15 minutes, and inform me, whether or not you’d purchase this inventory.”

Separating the winners from the canine is what Waldorf’s company delight themselves on, in order that they dig in with gusto. The bullet factors reveal that Blindfold Inc. posted internet losses of $1 billion over the previous 4 quarters, however that revenues have greater than tripled since 2016 to round $30 billion final yr. Its market cap is now $110 billion. Waldorf doesn’t make any assumptions concerning the returns his company would count on from Blindfold, however notes that for the shares to rise at 10% a yr, its market worth would want to achieve $220 billion within the 7 yr interval via the shut of 2026.

The abstract notes that if the inventory commanded a P/E ratio of 30 in 2016, it will must generate over $7 billion in internet earnings. A superb return on gross sales—internet income as a proportion of revenues—for the trade is round 7%, and that the majority of Blindfold’s rivals fall within the 5% to six% vary. Reaching a 7% margin requires increasing revenues to over $100 billion. That’s a three-and-a-half instances its present gross sales of $30 billion.

The bullet factors additional notice that Blindfold would want to develop the items it sells four-fold, and in doing so, seize 35% of the whole enhance in items offered worldwide, regardless of competitors from entrenched rivals.

The fifteen minutes are up. “So is it sure or no?” queries Waldorf. “I simply can’t guess on an organization that should obtain these sorts of progress charges for that lengthy. That hill is simply too steep to climb,” grouses one visitor. “It’s a no.” “What in the event that they’re profitable, which means they develop decently however not on the astounding charge required?” says one other. “Then the inventory collapses, and it’s doing fairly properly, however my of us in my fund are livid trigger they’re not!” “I want a brandy,” says a 3rd visitor. “Are the gamers on this enterprise which can be rather a lot larger than Blindfold actually going to let it take one-third of tomorrow’s market away from them? It’s a fantasy.”

All six company vote “no.” Then Waldorf rips the blindfold from “Blindfold Inc,” and divulges that it’s Tesla. The invitees didn’t guess, as a result of Waldorf disguised his topic by including 20% to all of Tesla’s actual numbers. A few company sheepishly acknowledge proudly owning the electrical vehicle-maker’s shares. “It’s particular, it’s the longer term,” says one. “Tesla was one of many nice shares of 2019,” says one other. “If we’d have bolted, we’d have missed a 35% achieve!”

“I acknowledge that Tesla has plenty of panache,” permits Waldorf. “However I don’t pay for panache. My blindfold take a look at exhibits that when the panache is stripped away, and also you’re confronted with the pure numbers and hurdles, all of you choose that Tesla as a anonymous, robo-stock is a awful purchase.” Waldorf will get nods from two traders who shunned Tesla as a result of they too adopted the numbers and shunned the glamor, and well mannered handshakes from the believers. For them, Waldorf is as hopelessly quaint because the ivy adorning the partitions of his membership.

In actuality, Tesla’s market cap is $89 billion—by the best way, closing in Volkswagen’s valuation—in order that delivering 10% returns would hoist its worth to $180 billion by the tip of 2016. That may solely occur if its gross sales surge from $25 billion to over $80 billion. Reaching these targets mandates capturing one-third of the projected enhance in all luxurious automobile gross sales, leaving Volkswagen’s Audi, Daimler-Benz, BMW and the opposite premium producers to divide up what’s left, and battle with paltry progress whereas Tesla prospers.

Everytime you get intoxicated by Tesla’s glamor and daring, keep in mind Mr. Waldorf’s blindfold take a look at.

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—That nice 2019 S&P rally? It has massive warning indicators for 2020
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—Why you truly could need to purchase “bears” in a bull market
—5 CEO exits that sum up the memorable enterprise yr that was 2019
—What a $1,000 funding in 10 prime shares a decade in the past can be value at present

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