Monday, January 27, 2014

Tesla Falls After Projecting Small Profit Increase- Discussion Topic 11/7/2013


  1. Fundamentals:
    Tesla sold about 20,000 Model S cars in 2013, and is expects to produce 50,000 units in the future. Given the gross margin of 23%, and average sales price at $100,000, Tesla can generate $1.15 billion gross profit every year. Note that CapEx accounts for more than 30% of the net income for the past several years. Current Mkt Cap= $17.05 billion (debt less than 5%), EV: 19.54 billion, WACC (approximation based on beta=.63, rf=3%, RP 5%)= 6.35%, levered CF = FCF= -288 million. The current price is trading at 294x Earnings. Price to sale 14x , industry average 0.6x. Model X is expected to enter in 2014, and a cheaper Sedan is expected to be released in 2016.

    Tesla is in the BEV (Battery Electric Vehicle) industry, this industry is disruptive, which may have 200% yoy growth over the next few years. (see article:, However, the supply of the battery cell for those cars are very constrained as emphasis by Elon Musk (CEO of Tesla). It is hard to raise production due to the limited supply. Limited production will greatly hurdle the profit, since there will be less cars to bear FC
    In addition, there are fuel price risks (BEV cars price will be negatively affected), policy risks (government policy encourages the BEV industry, but the subsidy is about to be cut by 40% (10 million for the 3rd quarter, comparing with more than 50 for the past two quarters), competition risks (Damiler, Toyota cars are cheaper).

    Strong sell
    Tesla has a niche luxury car market, but it is growth is constrained by many risks, and even it can deliver its products in the future, (Suppose 100,000 cars can be produced and each sold at $100,000, and a 1 billion EBITDA) the company still seemed to be overvalued at an EV/Sales=2, EV/EBITDA of 19, comparing with Damiler- EV/Sales= 1.11, EV/EBITDA= 9.40. Given the current market price at $140, which is almost 20% lower than 1 month ago. I recommend a price target of $100.

  2. he sale revenue is generated from two lines: Auto sales and development services.

    -Auto sales:

    Automotive sales revenue of $385.7 million increased 160% from the year ended December 31, 2011. Model S is the most profitable driving forces for the company.

    -Development services revenue decreased to $27.6 million for the year ended December 31, 2012 from $55.7 million for the year ended December 31, 2011

    Geographically, sales in North America is almost seven times of the rest of the world. Second most sales in Europe and the rest in Asia.

    -Risks and Concerns
    1, increasing accounts payable, too much debt
    2, thus too much leveraged business, then too much ups downs
    3, because the business is capital intensive, making it a risky investment in and of itself.

  3. Investment Thesis: short term hold. Long term the stock will continue to grow.

    California-based electric-car maker Tesla Motors said it lost $38 million in the third quarter, or 32 cents a share, according to GAAP, on revenue of $431 million.
    That was worse than the 25-cent loss that analysts using GAAP had forecast.
    Although in the previous 4 years Tesla has a significant increase in sales but they spend a lot of Money on selling General Admin Expense and R&D expense, which lead a really low operating income. So their Net income is decreasing in the past four years. But on 2013, they cut a lot of money on selling expense and R&D expense, which leads them a great explosive on the last 3 quarter.

    Reason to invest
    1. Musk said Tesla is considering building a new “giga factory” that would produce battery packs needed as the carmaker’s output grows

    2. Model X electric sport-utility vehicle start in 2014

    3. European and Asia market: About 1,000 cars went to Europe during the quarter, the company said. Shipments to China should begin in January, with initial sales planned for February

    Investment Risk:
    1. Market size is still unproven

    2. Significant shortfall of Model S demand and inability to raise new equity could challenge min. liquidity thresholds

    3. Battery risk. The battery powered EV's like the Tesla can become a night mare of stress for owners. When they are running low on battery power and they may not be able to reach or find a so-called fast charging station. These EV's are OK for city or town local drives. Where you stay inside a 50 mile R/T (100 miles) and plug them into a charger immediately after each trip. But all this Tesla marketing hype about driving 200 miles at 70 mph is just hype and a bucket of stress as you get close to the battery’s 190 miles (power limit) . No two battery packs are alike, and as they age they gradually loose capacity at different rates

    4. Battery Service. We have AAA if we are running out of gas but if we run out of battery. We need to Call Tesla factory

  4. Investment thesis: sell in short run, buy in long run.

    -Revenue generator: Model S—flagship product. Unit price: $62500 and above. It’s a luxury car in US market. Tesla plans to deliver 21500 units this year and 5600-6500 this quarter.
    -Positive gross profits but negative operating loss in continuous 3 years from 2010, resulting from a high R&D expense.
    -Plan to build a new “giga factory” to produce the battery cell.
    -EPS is higher than last year and than estimation.
    -Tesla fell 7% today. It's the third time in the past 6 weeks that Tesla car was on fire, resulting the stock price falling by almost 20%.

    -Production constrained. Tesla has a lower supply than demand. It should improve production. Only by higher productions, Tesla can cover the high R&D expense.
    -Undiversified Products. Tesla only has one main product currently. The new Model X delivery in volume has been delayed to 2015, from 2014. Further delays might slow down the growth of the company. I think Tesla should launch a lower-level product targeted at the young consumers.
    -Safety issue. Tesla has to pay more attention to the safety concern. Although they have claimed that the fire is not caused by the technique problems, investors are surly disappointed and sensitive to the car accidents. That’s also the reason I sell Tesla in short run.
    -Undiversified market. Tesla should pay more attention on overseas markets, especially Europe and Japan. Consumers there are very concerned about environment issue. In China, consumers don’t have strong sense of environmentally friendly, so Chinese market is not recommended in recent years.

  5. Tesla Motors Inc.

    Investment Thesis- Sell

    Products or Service
    • Roadster. Electric sports car. Delivered from 2008; As of December 31, 2012, sales 2,450 to customers in over 30 countries
    • Model S. Passenger sedan. Delivered from 2012; As of December 31, 2012, sales 2650
    • Model X (Upcoming). Fills the niche between minivan and SUV
    • Full electric powertrain systems and components. Begins in 2014.
    • Service provided in sales and service network in North America, Europe and Asia
    • Government SEV credit program

    2013 Q3 Performance Review
    • Revenue
    - Model S sales 5,500, lower than the analysts’ expectation.
    - Q3 non-GAAP revenues were $603 million, up 9% from Q2 (18% without ZEV revenue)
    - Q3 GAAP revenues were $431 million, up 6% from Q2 ($50.1 million a year ago)
    - Q3 ZEV credits revenue falls to 10m
    - Over 60% of the revenue comes from the oversea market
    • R&D cost is increasing; $48m non-GAAP; $56m GAAP
    • SG&A is increasing; $67m; $77m
    • An improvement of non-GAAP gross margin of 21% from 14%
    • 2013 Q3 Non-GAAP net income $16m, $0.12 per share
    • 2013 Q3 GAAP net income -$38.5 million (32/share), compared with 2012 Q3 -$110.8 million ($1.05/share)

    - The price isn't competitive ($70,000 - $100, 000)
    - The cost of batteries
    - The safety problem; Three accident caused battery fire in recent month
    - Supercharger Network & operating cost

  6. Tesla Motors sells two things: primarily, high-performance fully electric vehicles; secondly, advanced electric vehicle powertrain components. Vehicles, options and related sales dominates the company’s revenue growth; while powertrain component represents a decreasing percentage in the overall sales – from over 30% in 2011, to 8% in 2012, down to less than 3% as of the end of the second quarter. The company also generates minor revenue on development services to Daimler and Toyota. The cost of automotive sales was almost 99% of the overall cost in the latest quarter.
    Revenue 2011 2012 2013 six month
    Vehicles 68% 92% 97%
    Powertrain component 32% 8% 3%

    What really matters at the point is whether Tesla could generate sufficient sales growth to keep up with investors’ expectation. The stock prices has slumped by 21% since the company released its third quarter financial results two days ago, resulting from worse-than-estimate sales, despite the fact that revenue increased by 761% year-on-year.
    CEO Elon Musk mentioned that sales at this point is not constrained by demand, but rather by production and its supply chain. This reduces the issue of sales growth to simply projection of manufacturing capability. Based on deliveries figures of Model S in the past quarters and the 4th quarter outlook by the company, we can fit very well either a linear regression line or a slightly concaved exponential regression line. I feel despite of a lot of discussion, there is not as much fluctuation as the market suspects. Panasonic has recently signed a deal with Tesla to supply at least 1.8 billion cells over the next four years, and Tesla will either build its own cell factory or seek additional suppliers such as Samsung. With the predictable supply chain, the company will probably meet its projection for the 4th quarter, and will increase production by 7-9% in the 1st quarter, 2014.
    With these in mind, I will recommend to buy Tesla at current price, but sells at any price higher than $200.
    Expand to Europe, Asia means no free cash flow

  7. Company Fundamentals:
    -First to commercially produce a federally compliant electric vehicle
    -The company is adapting the platform of its second vehicle, the model S sedan, to develop its Model X SUV
    -Tesla currently operates 31 stores and service locations across the globe

    Key profit driver:
    - Model S was the third highest selling car in In order to boost sales.
    - Tesla expects Model S sales to cross 40,000 by 2014
    - Production went up 25% to 500 vehicles per week and the company delivered 5,150 cars in the quarter

    Quarterly Financial Info:
    -Sales: Around 5,500 vehicles sold,
    -Revenue: $602 million sales revenue
    -Net Profit: Q3 non-GAAP net income was $16 million, or $0.12 per share.
    -Profit margin: Q3 non-GAAP gross margin was 22%, and 24% on a GAAP basis.

    Investment Outlook:
    1. Competitive market shares in electric cars industry
    2. International expansion: Tesla is now actively undertaking international expansion, particularly in Europe and China, the world s largest automobile market.
    3. Expanding product portfolio: Tesla is also aggressively working toward expanding its product portfolio to boost sales.
    4. Building supercharger network: The company is building a Supercharger network in the U.S. and internationally

    Risk to investment
    1. Loss profit: Despite increasing sales, Tesla still remains a loss making company.
    2. Supply chain problem: Tesla is facing supply chain problems, which are restricting its ability to increase production.
    3. Low number of charging station: The low number of charging stations is a deterrent for potential buyers of Tesla.

  8. Overview:
    - Revenue: Automotive sales & Development Services
    - Automotive sales: avg 83% of total revenue in the last three years & 93% in 2012. For 2012, revenue for auto sales was $358.7 m increased 160% from year 2011.
    - Vehicle, options and related sales, representing 92% of auto sales revenue for the year 2012,had an increase of 248%. This increase was primarily attributable to sales of Model S, while offset by a decrease in the number of Tesla Roadsters sold.
    - Development services revenue for the year ended December 31, 2012 was $27.6 million, representing a 51% decrease from the year ended December 31, 2011.

    Quarterly Performance:
    - Q3 revenues were $603 million; Drop in ZEV credit revenue to $10 million in Q3 down from the $51 million in Q2; Gross margin was 22%, and 24% on a GAAP basis.
    - Q3, generated $26 million of positive free cash flow, a new record for positive cash flow generated in any quarter.
    - Q3 sold 5,500 vehicles during last quarter, lower than analysts’ estimates, but not bad at all when compared against the company's guidance of slightly over 5,000.

    - Increasing demand on its electronic cars. Tesla has acquired substantial market share and has large automaker clients for its electric powertrains components.
    - International expansion, particularly in Europe and China
    - Product development pipeline (Model X and Model S right-hand)

    - Supply chain problems (including its cells supply) restricting its ability to increase production. Already working on this issue
    - Unexpected accidents last month may increase future recall probabilities
    - Limited charging stations. even more prominent in international markets like Europe and China and may restrict its international expansion.
    - New products delays.
    - Small total sales amount results in higher fixed costs.

    Conclusion: price dropped because of analysts’ overcharged expectations, but Tesla has long-term growth potential. Buy and hold in long run.