LIST OF ABBREVIATIONS
2. INTERNAL VALUE DRIVERS
2.1. TECHNOLOGY & INNOVATION:
2.2. ELON MUSK:
2.3. LAUNCH OF NEW MODELS (MODEL 3 AND MODEL 8)
3. EXTERNAL VALUE DRIVERS
3.1. ELECTRIC VEHICLES MARKET IN THE FUTURE
3.2. REGULATIONS AND LAWS
4.1. RELATIVE VALUATION
4.2. SCENARIO ANALYSIS
Tesla, Inc. is an American electric vehicle (EVh) manufacturer, energy storage company, and solar panel manufacturer based in Palo Alto, California. In the following report, Tesla’s value drivers will be summarised and their influence on key valuation parameters will be analysed. Tesla’s valuation based on Multiples will be evaluated, followed by recommendations to investors. The valuation is based on Bloomberg data as well as an equity report by Barclays (Johnson, 2017), as it successfully acknowledges different future scenarios, as well as their probabilities. In addition, the equity research on electric trucks conducted by Deutsche Bank (Lache, 2017) has been used to identify electric trucks market potential as a value driver for Tesla.
2. Internal Value Drivers
2.1. Technology & Innovation
Regarding the innovation of the battery and its range (250 miles), Tesla has an important edge over its competitors. Moreover, Tesla is planning to build a worldwide network of supercharger stations that can deliver 200 miles of charge in about half an hour, compared to several hours of charge at an ordinary station (Bullis, 2013). Along with batteries, Tesla is also betting on autonomous vehicles and software upgrade technology that continuously improves the engine remotely (Goldfarb, 2017).
Tesla invested tremendously into its research and development (R&D) department in order to attract the brightest talents, and also into production plants (e.g. Gigafactory 1) in order to internalize most processes. As shown in Exhibit (A), these factors translate in burning large amounts of cash in both operating and investing activities in the past four years. By the end of 2017, the estimate of cash burnt in Tesla will amount to $10bn (Welch, 2017).
2.2. Elon Musk
Tesla’s most valuable asset is its co-founder and CEO Elon Musk, holding 22% of equity (SEC, 2017). Musk is a value driver due to his great ability to market and commercialize his vision for the future. His strategy, defining Tesla today, is based on R&D and ensuring its technological superiority.
Although Tesla has been generating negative income since its foundation in 2003, Musk has been capable of continuously attracting investors, who are a crucial part for realization and expansion of his vision. In addition, his vision to change the world, reflected in his disruptive companies SpaceX and SolarCity, contributes to the success of his enterprises by creating a concept of dream future (Elkins, 2016). He has been able to “sell” this abstract vision and make people invest in loss-making companies. As shown in Exhibit A, Tesla had cash inflows from equity and debt injections, which were the main sources of funding, amount to $2.8bn and $8bn respectively in the last fours years.
2.3. Launch of new models (Model 3 and Model 8)
According to industry experts, Model 3’s success is the crucial factor determining the future of Tesla (Jonas, 2017). The company has received 455,000 orders since its announcement. Tesla’s cash outflows have been mainly devoted to the development and production of its cheapest model, which starts at $35,000. If Tesla achieves the production target of 10,000 Model 3 cars per week by 2018 (Langan, 2017) and reaches the estimated synergies for increasing the EBIT margin, the high level of burned cash would finally generate a return. Under the given assumptions, Tesla will be able to generate profits and make up for its negative net income. However, due to the unexplained “bottlenecks” in the production that became public in the third quarter 2017 investors’ call, Tesla was forced to cut the production of Model S and X in order to use the resources for Model 3 (Oyedele, 2017).
Thus, any delays in Model 3 production and delivery will negatively influence the operating cash flows, forcing the company to raise either new debt or equity in the short term to improve future cash flows (Hull, 2017).
Furthermore, Tesla has been actively developing its electric truck, Model 8. Even though, the truck model is not released yet, disruption in the market might come sooner than expected and Tesla will be one of the key players, due to its competitive technology and cost advantage. According to Deutsche Bank (Lache, 2017), by 2020, 10% of US class 8 trucks and 15% of class 5-7 could be electric. Considering the most conservative scenario, modest success of Tesla’s Model 8, the company could achieve $7bn revenue by 2024 and $1bn in EBIT (Lache, 2017).
3. External Value Drivers
3.1. Electric Vehicles Market in the future
Consumers become more open to EVhs, due to an increase in environmental consciousness. With a growing economy, oil prices are also expected to rise, which is favourable for the EVh market and is likely to be reflected in increased EVh sales (Schenker, 2017). The potential of the EVh market has been widely acknowledged, and most car manufacturers are developing EVhs, reaching 136 models by the end of 2022 worldwide (Welch, 2017). Given the prospects for the EVh market, EVh purchases are clearly increasing and therefore revenues are expected to rise (Lienert, 2017). However, due to the increased supply, Tesla might not be able to sustain its market share. Accordingly, the impact on Tesla’s revenues, and therefore cash inflows, will be bilateral.
3.2. Regulations and laws
The development of energy and environmental policies are key to Tesla’s success, as an increasing number of car models are not able to meet the CO2 limits put in place. The policies differ from country to country. China, for instance, has created a quota of 10% EVhs for car sellers from 2019 on (Bloomberg, 2017).
A further growth driver of Tesla’s sales are subsidies to either the developer, in the form of loans, or the consumers of EVhs, in the form of purchase subsidy, tax reduction, free parking or free toll pass. However, recently Norway has excluded heavy cars (Model X) and Germany excluded EVhs with a purchase price above €60K (all Tesla Models except Model 3) from the subsidy (Vetter, 2017). Nevertheless, the aforementioned regulations predominantly have a positive influence on Tesla’s revenues.
Currently, Tesla has a competitive advantage due to its disruptive technology and its brand name. Vehicles available in the market include: Smart Two ED, Ford Focus Electric, Nissan Leaf, KIA Soul EVh, and Chevrolet Bolt (Breuninger, 2017). Tesla managed to penetrate the market with high investments and superior expertise. Due to low bargaining power of consumers, Tesla might benefit from offsetting initial costs, due to lack of alternative products in the market (Exhibit B). Moreover, bargaining power of suppliers is high, due to a low number of suppliers of EVh components. Since Tesla has very well-established relationships with suppliers, it gives the company a substantial competitive advantage over current competitors and potential new entrants. Tesla has heavily invested in R&D and developed great expertise, which create a barrier to entry for potential competitors. Yet, this strategy has translated into extremely high cash outflows. Tesla relies on the translation of these investments into high revenues in the future, improving the generation of cash at operating level.
4.1. Relative Valuation
Tesla’s Enterprise Value (EV) has been assessed using comparable companies methods. Tesla’s peer group was identified with the Bloomberg database. The screens used included: Company type “public company”, industry classification “automobile manufacturer and solar energy”, geography “current operating countries”, market capitalization (latest) “> $5bn (automotive); > $0.5bn (solar energy)”. Excluding Tesla and automobile companies that do not invest in electric technology, the screening produced a peer group of 26 companies (Exhibit C).
In addition to the market valuation of each company, we have reported financial statistics of the last twelve months (LTM) at income statement level together with the margins, as well as the EV/Sales, EV/EBITDA, Price/Sales (P/Sales), and Price/Book Value (P/BV) for 2015, 2016 and LTM. First, the mean multiple of each year was calculated and weighted according to the current proportion of automotive and solar energy revenues, 90% and 10% respectively. As shown in Exhibit C, ranges have been identified for each multiple, which were used as base for the calculation of Tesla’s potential EV and Equity Value. The actual level of debt, Non Operating Cash and Preferred and Others have allowed to compare EV Multiples and Equity Multiples.
However, the valuation method based on Multiples has some serious limitations. First, Tesla does not possess direct competitors, and second, the company is still in its developing stage and therefore has higher growth rates and lower margins, due to its high spendings on R&D. The four applied multiples result in EVs within a large range from $1,719mn to $17,309mn. These very distinctive EVs for Tesla again highlight the unreliableness of the application to Tesla.
4.2. Scenario Analysis
Accordingly, a more sophisticated way to assess whether Tesla is under- or overvalued is to project its revenues in the future. Based on the Barclays scenario analysis (Johnson, 2017), the three most probable scenarios were identified and analyzed further. As shown in Exhibit D, profit margins were increased to the current level (20%) and price multiples were decreased to the current industry average (10x) for the most pessimistic scenario. Weighting the three scenarios implies that Tesla’s share price is overvalued by approximately $164.