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Tesla Motor Company Analysis

Aline Torres, Shikher Verma, Hai Van, Jingwen Xie, Nghi Tran, Emad Zuberi

Business Strategy:
Tesla, Inc. is a major American automaker, energy storage company, and solar panel manufacturer

based in Palo Alto, California. The company was initially founded in 2003. The company specializes in

electric cars, lithium-ion battery energy storage, and, through their Solar City subsidiary, residential solar

panels.

Tesla first gained widespread attention following their production of the Tesla Roadster, the first

fully electric sports car. Teslas initial strategy began like a startup: to build a minimum viable product to

test the market. So they built the Tesla Roadster, which was essentially an electric Lotus, and it sold well.

They then moved into the luxury market where they applied plenty of competitive pressure with the

Model S. And recently they announced the final part of their plan: a mass-market vehicle cost around

30000, that quickly racked up years worth of pre-orders.

Also, Teslas new plan involves a substantial pivot. Tesla is doubling down on clean energy and

plans to use its cars as a means to convert households to solar power. And it is doubling down on

autonomous vehicles, which is something that threatens to change the entire business model of the auto

industry. Tesla current CEO, Musks plan to make Tesla truly clean involves marrying the selling of

vehicles with the installation of solar panels on houses. Musk and his family already own the main entrant

in the latter category Solar City and so Musk wants to merge the companies. He clearly believes there

is more innovation to be had with the two businesses combined.

Financial Analysis:

Tesla Motor Company is a new and unique automotive manufacturer it is difficult to fully

compare its financial analysis with other auto manufacturers. However, we can discern how Tesla Motors

is performing financially as a young company.Tesla Motors had negative return on equity in 2016.

However, because a company has a negative REO doesn't mean that it is a bad investment. Free cash flow
is another way to measure profitability and can be used instead of net income. Looking only at net income

can be misleading. Tesla's return on equity percentage is one of the lowest in the auto manufacturer's

group. It is normal for businesses in their early years to have a negative return. Tesla's Return on asset is

negative which means that it is investing a high amount of capital with little income in return.

Asset turnover refers to the company's sales/revenue generated relative to its assets.Typically, the

higher the asset turnover ratio, the better a company is doing. However, ratios vary from one industry to

another. For example, the financial sector will have a very different ratio compared to merchandising

sector. Tesla's asset turnover is lower than its peers. Tesla's biggest challenge is matching the demand and

its production. Current ratio, quick ratio, and financial leverage all measure liquidity or financial health.

Tesla's quick ratio shows that at the moment the company cannot fully pay back its current liabilities.

However, Tesla's current ratio of 1.07 indicates that it can meet short term obligations. Tesla is in good

short-term financial strength. The financial leverage is relatively high. This means that a high percentage

of Tesla's assets are being financed by debt or equity.

There are 3 key financial ratios that are key to understanding Tesla's financial health those are

gross margin, operating margin, and inventory turnover. Tesla is a relatively young company that is

growingly rapidly. Therefore, it's main emphasis is not profitability. Gross margin measures how effective

an auto manufacturer manages its manufacturing process relative to maximizing profit. Currently Tesla is

finding ways to increase capacity which will lead to fixed costs being spread over a large amount of

vehicles. Which will possibly decrease the costs of the vehicles in the future. Tesla's operating margin is

often negative and very volatile. Currently Tesla is investing heavily in R&D and intensely marketing to

promote sales and that is a large factor why its operating margin is negative . Lastly Tesla has a lower

inventory turnover compared to its peers. The biggest issue that Tesla is facing is matching the demand of

its vehicles. Currently Tesla's production is limited.


Accounting:

Tesla is currently investing heavily in R&D which means that they have a lot of expenses at the

moment that they cannot count towards the value of any assets that may come from their research. As

such they must expense R&D costs and any assets that may be created will not be on the books for much

even though they may be very important and perhaps industry changing.

Since they are mostly focused on developing their cars and SUVs at the moment, they are not

putting as much effort towards their home related goods like the Solar Roof or other home power

solutions. Either way research is still being done and they are making their way. With the purchase of

Solar City they acquired many assets related to Solar roof technology and probably much research

towards that as well. Which might have increased their intangible assets.

The Model 3 that they announced that will be in production later this year has already many pre

orders, which means that Tesla received a lot of cash from people who preordered them. They can make

use of that cash but will not be able to fully recognize the revenue until they have delivered their part.

Their Customer Deposits account on the statement of cash flow significantly increased with the

announcement of the Model 3 pre orders, from 2015 to 2016. We do not expect it to see another large

jump like 2016, but it will still continue to increase significantly until they can finally start production to

meet demand.

With the development of the gigafactory we will see an increase in their expenses to build and

equip this factory with what they will need to produce their cars and solar panels. As such we will see an

increase in their plant, property, and equipment.

Since solar panels and related installments are not exactly cheap we will also see an increase in

the lease of these systems as people will typically not be able to buy the systems outright. There will also

be a similar trend with the cars, even though the Model 3 is priced to be more for the average consumer it

is still expensive to which people would leases them.


Forecasting: We decided to forecast up to 2 years due to there is not much information out there about

Tesla beyond 2018.

Income Statement Revenues Forecast:

Tesla produced total of 83,922 vehicles in 2016. There was a 64% increase from 2015 due to high

demand in Model 3. We predicted that Tesla will produce estimate of 191,100 vehicles in 2017, which

means 2,000 vehicles will be produced per weeks but Tesla will produce 3,700 vehicles per week in the

last quarter due to the new opening gigafactory in Nevada and demand of Model 3 (as illustrated in the

graph 1). Therefore, we estimated the automobile growth rate are 108% and 123% in year 2017 and 2018,

respectively. As for automotive leasing revenue, we anticipated the growth rate in automotive leasing will

growth proportionately to the growth of automotive revenue. Other revenues such as energy generation

and storage; services and others are not mainstream in Tesla, so we assumed that the growth rate in other

revenues will grow steady based on the previous years.

As for cost of revenues section, we assumed that the forecasted expenses will be directly

proportionately to its own revenue and adjusted the rate based on the demand. For instance, the growth

rate of automotive cost is 4,268,087/5,589,007 = 76%, but we expected it to be higher in the future so we

estimated it to be around 79% due to higher CAPEX. However, for year 2018, we expected the cost rate

will be 20% lower due to the economies of scale. We expected Tesla to produce more cars in 2018 than

2017; therefore, the cost per unit of output generally spread out more over units of output which will

derive the low cost, more stability in supply chain as more components will be produce in one location,

gigafactory; and increase in overall demand for electric cars. Based on the past three years of net loss and

higher costs in 2017 like the increase in CAPEX and gigafactory, we anticipated Tesla will have a net loss

in 2017 (graph 2).

Balance Sheet Forecasting:


We anticipated assets of Tesla has a direct relationship with the percentage of revenue. So we

used the percentage of revenue to forecast account balance and cash is plug figure to balance the Balance

Sheet. As for liabilities, it is also in direct relationship with the percentage of revenue until Customer

Deposits, similar to assets. As we get to Current portion of solar bonds issued to related parties, there is

not enough information on 10K so assuming there is no change in balance. Same with convertible senior

notes and solar bonds issued to related parties. As for Long-term debt and capital leases (net current

portion), 190% increase from prior year, then minus the current year payment to get current year LT debt

(net current portion). Finally, for stockholders equity, we believe that Tesla will release more of its

common stock to generate more cash to cover the operating expenses and capital expenditure. Due to this

we predict that for 2017, Tesla will introduce 37 million shares. With respect to this, additional paid in

capital will grow accordingly.

Pro Forma Predictions

Tesla Growth Opportunities: The Gigafactory

Tesla is currently developing a Gigafactory which sits on 3,000acres of desert outside Reno,

Nevada. Its a facility where Tesla works together with their suppliers to integrate production of battery

materials, cells, modules and battery packs in one location. Tesla has started the production of lithium-ion

battery cells for energy storage products in the first quarter of 2017.

It's Gigafactory is now about one-sixth its final size. Once it's finished, Musk says the 13 million

square-foot plant will be able to produce more lithium-ion batteries than were produced in the entire

world in 2013 by 2020, the plant is projected to reach full production with 150 GWh of battery pack

output.

The Production Activities and Tesla Stores

To increase more production capacity at the Tesla Factory, Tesla is improving the assembly line

and upgrading the body center, building new paint shops and body shops.
Tesla is also expected to open 80 more retails and service locations. This will help current owners of to

have better turnaround time for servicing and ordering of parts for their Model S and Model X.

Tesla is also expected to open 300 new supercharger locations throughout world for its customers to have

better reach for longer driving routes.

Valuation:

Teslas stock went public in 2010 at a price of $17 a share. Today (April 11, 2017) a share of Tesla stock

is worth $308.71. With a share of stock at $308.71, Teslas market cap is $51.93 Billion, putting Tesla in

a neck-and-neck race with General Motors for the title of largest U.S auto maker by market value.

Despite the close market valuations, the market shares between General Motors and Tesla are a

completely different story. General Motors sales took up 17.3% of market shares compared to Tesla with

only 0.2% of market shares. The reason Tesla has such a large market valuation, despite a small market

share, is potential. The automotive industry is slowly creating a vision that could overtake century-old

competitors. As David Whiston of Morningstar explains, Its indicative of the market wanting to pay for

potential, including into markets that dont exist yet in any large size such as [electric vehicles], home

energy generation and storage, rather than profits and cash flow today that the large automakers generate.

Based on projected cash flows of Tesla for the years 2017 and 2018, Teslas market valuation

using the discounted cash flow model is only $10.37B. We decided to use a discount rate of 14% in the

valuation of the discounted cash flow because of Teslas high and growing debt. Despite five times

revenue growth in two years, Teslas cash does not follow. Tesla increased cash comes from the issuance

of common stock and revenue growth, however; a majority of the cash will be reinvested in the company

and/or pay off its growing debt. After further valuation of the company stock, we decided that Tesla is not

an attractive option to invest in. Tesla is overvalued at the moment and much of its growth will depend on

whether Tesla can reach its full potential. At the moment, current shares of Tesla have already taken into
account the possible growth as many investors see Tesla has a startup tech company instead of an

automotive one.

Supporting tables and graphs

Graph 1: Production growth for Tesla automotives


Link to 10-K: http://ir.tesla.com/secfiling.cfm?filingid=1564590-17-3118&cik=1318605
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