Tesla financial analysis

7/25/2019 Tesla financial analysis

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2015FEPSchool ofEconomics and

Management of Porto

Filipe S Couto;PedroPilar;GuilhermeBaptista;Rui Tavares

Financial Management

VALUATIONECONOMIC AND

FINANCIAL ANALYSISFilipe S Couto 201200211 | Guilherme Baptista 201201371

Pedro Pilar 201502398 | Rui Tavares 201205663


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Filipe S Couto | Guilherme Baptista | Pedro Pilar | Rui Tavares Page 2

INDEX

1. Abstract .................................................................................................... 3

2. The Company .......................................................................................... 4

2.1. History ............................................................................................................. 4

2.2. Product Portfolio ............................................................................................. 4

2.3. Mission and Vision ......................................................................................... 7

2.4. Strategy .......................................................................................................... 7

2.5. SWOT Analysis ................................................................................................ 9

2.6. The Electric Vehicles Sector ........................................................................ 10

3. Macroeconomic Overview .................................................................. 11

3.1. Economy ...................................................................................................... 11

3.2. Main Sectors of Economy ........................................................................... 12

4. Indicators of Performance .................................................................... 14

4.1. Market Performance ................................................................................... 14

4.2. Dupont analysis............................................................................................ 14

5. Tesla Valuation ...................................................................................... 17

5.1. Cash Flow Analysis ...................................................................................... 17

5.1.1. Previous Years Cash Flows..................................................................................... 17

5.2. Projection of Future Cash Flows .................................................................. 18

5.3. Weighted Average Cost of Capital (WACC) ............................................. 20

5.3.1. Transition Period Beta Estimation.......................................................................... 20

5.3.2. Transition Growth WACC estimation.................................................................... 21

5.3.3. WACC Stable Period............................................................................................... 22

5.4. Sensitivity Analysis ....................................................................................... 23

5.5. Relative Valuation ....................................................................................... 24

5.6. Bankruptcy Risk............................................................................................ 29

5.7. Monte Carlo Simulation ............................................................................... 30

6. References ............................................................................................. 33


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1. ABSTRACT

We, students of Master in Management, were asked in the Financial Managementcourse to do an evaluation of the company Tesla Motors as a mandatory requisite of

the course.

This work has the final goal of reaching to an estimate value of Tesla Motors in the near

future, a US car manufactory that is nowadays trending due their idea of revolutionizing

transportation, using only electric energy.

This assignment will be divided in two main parts. The first one will be focusing on the

actual and past situation of Tesla, talking a little bit about the company itself, history,

goals, plans, strategy, financial situation as well as a macroeconomic consideration

watching indicators like inflation, Gross Domestic Product (GDP), unemployment, etc.

This way we can have a better idea of the surroundings of the company to do an

improved forecasting of its future. The second part is directed to the future life of Tesla,

as we will preview, using some assumptions, the actual value of the company.


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2. THE COMPANY2.1. History

Tesla Motors was founded in 2003 by a group of engineers in Silicon Valley who wanted

to prove that electric cars could be better than gasoline-powered cars.

With incredible power, and zero emissions, Teslas products would be cars without

compromise. Each new generation would be increasingly affordable, helping the

company work towards its mission: to accelerate the worlds transition to sustainable

transport.

2.2. Product Portfolio

Teslas engineers first designed a powertrain for a sports car built around an AC

induction motor, patented in 1888 by Nikola Tesla, the inventor who inspired the

companys name. The resulting Tesla Roadster was launched in 2008. Accelerating from

0 to 60 mph in 3.7 seconds and achieving a range of 245 miles per charge of its lithium

ion battery, the Roadster set a new standard for electric mobility. Tesla would sell more

than 2,400 Roadsters, now on the road in more than 30 countries.

Tesla Roadster

In 2012, Tesla launched Model S, the worlds first premium electric sedan.

Built from the ground up to be 100 percent electric, Model S has redefined the very

concept of a four-door car.

With room for seven passengers, Model S provides the comfort and utility of a family

sedan while achieving the acceleration of a sports car: 0 to 60 mph in about five

seconds. Its flat battery pack is integrated into the chassis and sits below the occupant

cabin, lending the car a low center of gravity that enables outstanding road holdingand handling while driving 265 miles per charge.


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Model S was named Motor Trends 2013 Car of the Year and achieved a 5-star safety

rating from the U.S. National Highway Traffic Safety Administration.

In late 2014, Tesla CEO Elon Musk unveiled two dual motor all-wheel drive configurations

of Model S that further improve the vehicles handling and performance.

The 85D features a high efficiency motor at the front and rear, giving the car

unparalleled control of traction in all conditions. The P85D pairs a high efficiency front

motor with a performance rear motor for supercar acceleration, achieving a 0 to 60

mph time of 3.2 secondsthe fastest four-door production car ever made.

Model S

Now with more than 50,000 vehicles on the road worldwide, Tesla is preparing to launch

Model X, a crossover vehicle that enters volume production in 2015. Featuringexhilarating acceleration, falcon wing doors, and room for three rows of seating, Model

X defies categorization.

Model X


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Tesla owners enjoy the benefit of charging at home so they never have to visit a gas

station or spend a cent on gasoline. For long distance journeys, Teslas Supercharger

network provides convenient and free access to high speed charging, replenishing half

a charge in as little as 20 minutes. Superchargers now connect popular routes in North

America, Europe, and Asia Pacific.

Teslas vehicles are produced at its factory in Fremont, California, previously home to

New United Motor Manufacturing Inc., a joint venture between Toyota and General

Motors. The Tesla Factory has returned thousands of jobs to the area and is capable of

producing 1,000 cars a week.

The company is expanding its manufacturing footprint into other areas, including in

Tilburg, the Netherlands, where it has an assembly facility, and Lathrop, California,

where it has a specialized production plant. To reduce the costs of lithium ion battery

packs, Tesla and key strategic partners including Panasonic have begun construction

of a gigafactory in Nevada that will facilitate the production of a mass-market

affordable vehicle, Model 3. By 2020, the gigafactory will produce more lithium ion cellsthan all of the worlds combined output in 2013. The gigafactory will also produce

battery packs intended for use in stationary storage, helping to improve robustness of

the electrical grid, reduce energy costs for businesses and residences, and provide a

backup supply of power.

Tesla is not just an automaker, but also a technology and design company with a focus

on energy innovation.

Gigafactory in Nevada


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2.3. Mission and Vision

Tesla Motors company mission statement is to Move from a mine -and-burn

hydrocarbon economy towards a sustainable, solar electric economy.

2.4. Strategy

Electric vehicles are not a recent concept and most top automakers have in their

portfolio.

In 2014 the best selling EV was Nissans Leaf, the automaker sold more than 60.000 units,

more than twice the number units sold of Teslas Model S.

One of the biggest challenges the industry face EV refers to range anxiety, so this

important issue has become part of the brand strategy.

No driver will want to purchase a vehicle that runs out of energy too early, with

nowhere to recharge the battery.

Create the most compelling car company of the 21th century by driving the Worlds

transition to electric vehicles.


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So Tesla addressed this issue by offering a driving range in excess of 250 miles.

Now, that's more than twice the range offered by the nearest competitor, according to

data compiled by Cheat Sheet. In addition, 250 miles is a pretty decent range for

driving in city.

Other point strategy is the Superchargers. The Superchargers are free connectors that

Tesla has placed near strategic locations such as restaurants, shopping centers, and Wi-

Fi hotspots as part of its Destination Charging program.

Tesla has 498 stations with 2,804 Superchargers.

The company is planning to install these Superchargers at several other locations in the

next couple of years.

Teslas distribution strategy is very different from that of other automobile manufacturersincluding Ford, Fiat Chrysler, and General Motors. Unlike legacy automakers, Tesla does

not have a dealer network.

According to Tesla CEO Elon Musk, existing franchise dealers have a fundamental

conflict of interest between selling gasoline cars, which constitute the vast majority of

their business, and selling the new technology of electric cars.

In light of this difference, Tesla is pursuing a differentiated selling strategy for its cars. It

lets buyers book a car online, without having to visit any of the dealers. Tesla also offers

a test drive to its potential customers and this also acts as a customer contact point for

Tesla. Tesla has 17 stores worldwide (ACWI) to sell its cars. These stores help Teslainteract with potential customers.


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In terms of the Teslas sales and distribution strategy, this uses the online sales model

coupled with company-owned stores to sell its cars. A totally company-owned

distribution model is something totally new and is fraught with several challenges and

maybe problems.

The biggest challenge for a company in setting up its own distribution network iscapital, or rather the lack of it. It takes a substantial amount of money to set up a

distribution channel. For this very reason, vehicle manufacturers including Ford and

General Motors team up with third parties to sell their vehicles.

According to Tesla, the product specialists at its stores are not on comm ission. This

means that they differ from the ordinary auto salesman, whose sole aim is to sell the

vehicle.

Tesla is indeed a different company with a different strategy. To put it in CEO Elon

Musks words, Our technology is different, our car is different, and, as a result, our stores

are intentionally different. Moreover, selling more vehicles online reduces the

companys selling costs. The physical stores serve only as showrooms for Tesla vehicles.

In fact, in several states Tesla is not even allowed to sell vehicles through its stores. Tesla

is facing lawsuits challenging its distribution strategy.

2.5. SWOT Analysis

Strengths

Top sell in the high performance fully electric car market

The first to develop entirely electronic sports car

One of the only manufacturers of advanced electric powertraincomponents

More innovative designs

Weakness

No strong position in market value for cars

Production cost is higher than their competitors

Limited revenues which leads to lack of profitability

Only makes electric cars

Unable to peak production on time

Opportunities

Emerging markets and expansion abroad in India and Singapore

People are more concerned with the environmental issues

Alternate use of battery technology such as absorbing powers from solar panels

Threats

More competition over environment friendly cars

Expensive than the combustion engine cars

Regulations against the manufacturing of certain models


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2.6. The Electric Vehicles Sector

The recent ZSW report that found that the world electric car market was up to 307,000

at the end of 2014. Other stats noted there included:

China saw 54,000 electric cars registered in 2014, a growth of 120%; The US grew 69% to hit 290,000 total electric cars, about 39% of all electric cars

on the road;

Japan grew 45% to hit 110,000 total electric cars;

The overall global electric car market saw a growth of 76%.


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3. MACROECONOMIC OVERVIEW3.1. Economy

The United States is the most powerful economy in the world.

Following the financial crisis of 2009, the country experienced its worst recession since

the 1930s. Thanks to the Governments large-scale budget and monetary stimulus plan,

the economy has been recovering. The GDP growth rate in 2014 was 2.2%. Despite this

positive result, the economy has experienced a high level of seasonal fluctuation: it

declined by 2.9% in the first quarter of 2014, but rebounded in the second and third

quarters, rising at a rate of 4.6% and 3.9% respectively. In 2015, growth could reach 3.4%

thanks to low interest rates, vigorous job creation and a low level of household debt.

In 2013, President Barack Obama tries to revive the economy, thus transferring

resources to the most vulnerable sectors in order to ensure economic growth in theseareas. He also launched a plan to reduce the public deficit, but an aging population

will increase spending on health.

It was implemented a new financial regulatory legislation, which imposed numerous

fines to banks in 2014 and became the financial regulation and supervision on the part

of the government's priority markets. On the other hand, measures were adopted in

September 2014 to combat tax evasion by US companies. These measures should be

able to recover $ 20 billion in tax revenues over ten years.

Internationally, the United States faces conflicts in Ukraine and the Middle East and the

economic slowdown of its main partners. The rise of the dollar penalizes exports in 2014and the global financial crisis caused a significant increase in unemployment, which

however declined to 6.1% in 2014. Calculating the discouraged workers who left the

labor market, and those who are forced to accept part-time jobs, the real

unemployment rate is 11.5%, against 10.8% before the crisis. However, wages do not rise

sufficiently and inequality has increased since the 1980s, currently reaching its highest

point.

In 2014, the number of US citizens owners of a real estate reached its lowest level since

1995. This increase in household purchasing power is significant, since their spending

accounts for 70% of national economic activity.


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Main Indicators 2011 2012 2013 2014 2015 (e)

GDP (billions USD) 15,517.93 16,163.15 16,768.05 17,416.25e 18,286.69

GDP (Constant Prices, Annual %

Change) 1.6 2.3 2.2 2.2e 3.1

GDP per Capita (USD) 49,746 51,450 53e 54,678e 57,045

General Government Balance (in %

of GDP)-7.8 -6.3 -4.8 -4.0e -3.3

General Government Gross Debt (in

% of GDP)99.0 102.5 104.2 105.6e 105.1

Inflation Rate (%) 3.1 2.1 1.5 2.0e 2.1

Unemployment Rate (% of the Labor

Force)8.9 8.1 7.4 6.3 5.9

Current Account (billions USD) -459.35 -460.75 -400.26 -430.94e -483.58

Current Account (in % of GDP) -3.0 -2.9 -2.4 -2.5e -2.6

Source: IMF - World Economic Outlook Database - 2014

3.2. MAIN SECTORS OF ECONOMY

No doubt that the American agricultural sector is the most important in the world; it is

characterized by high productivity and the use of very modern technologies.

The United States is one of the leading producers of corn, soybeans, beef and cotton.

Only California produces more than 12% of total agricultural production of the country,

but statistically, agriculture represents no more than 1% of US GDP and employs 1.6% of

the working population.

The United States is one of the most industrialized countries.

The industrial sector represents 21% of GDP, where the most important sectors are the

manufacture of electrical and electronic machinery, chemicals, industrial machinery

and also the agri-food and automotive sectors.

The country is also the world leader in the aerospace and pharmaceutical industries

and the abundance of natural resources turned the US into a leading manufacturer of

various minerals and allows you to maintain a diversified production.

The United States is also the largest producer of liquefied natural gas, aluminium,

electricity and nuclear power, and the world's third largest oil producer.

The American economy is essentially based on services. The tertiary sector accounts for

more than three-fourths of the GDP and employs 81% of the country's workforce.


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Breakdown of Economic Activity By Sector Agriculture Industry Services

Employment By Sector (in % of Total Employment) 1.6 16.7 81.2

Value Added (in % of GDP) 1.4 20.5 78.1

Value Added (Annual % Change) 12.1 1.8 1.7

Source: World Bank - 2014.

Monetary indicators 2008 2009 2010 2011 2012

US Dollar (USD) - average annual exchange rate compared

to 1 EUR

1,46 1,39 1,32 1,39 1,29

Fonte: CIA - The world factbook

Foreign Trade Indicators 2010 2011 2012 2013 2014

Imports of Goods (million USD) 1,969,184 2,265,894 2,335,537 2,331,367 -

Exports of Goods (million USD) 1,278,263 1,480,432 1,545,710 1,578,972 -

Imports of Services (million USD) 374,894 400,561 416,813 427,260 -

Exports of Services (million USD) 540,587 597,925 630,284 662,111 -

Imports of Goods and Services (Annual

% Change)12.7 5.5 2.3 1.1 -

Exports of Goods and Services (Annual

% Change)11.9 6.9 3.3 3.0 -

Imports of Goods and Services (in % of

GDP)15.8 17.3 17.1 16.5 -

Exports of Goods and Services (in % of

GDP)12.4 13.6 13.6 13.5 -

Trade Balance (million USD) -648,678 -740,644 -741,172 -702,587 -741,462

Foreign Trade (in % of GDP) 28.2 30.9 30.7 30.0 -

Source: WTO - World Trade Organization; World Bank


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Number of Shares

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Market Capitalization

4. INDICATORS OF PERFORMANCE4.1. Market Performance

From the 3 graphics below we can obviously see that after 2012, that is when TESLAreally started to operate and sell cars, the investors expectation started to increase.

Therefore, even with a slightly increase in the number of shares, the price overcome

that growth and market capitalization went up really quickly.

4.2. Dupont analysis

Focusing on the past TESLAs performance, we decided to use the Dupont Analysis as a

guide for our reasoning. First of all we want to explain the assumptions we took in some

of on our calculations: in the ROA (return on assets) which normally is Net Income /

Equity in the dupont analysis, we did EBIT / Equity because EBIT is the remuneration of

the shareholders and debtholders where Net Income is just the remuneration of

shareholders. That is why the ROE is not equal to ROA*Financial Leverage; another

assumption was that on the calculation of the Break Even Point, we considered the

SG&A (Sales, General and Administrative expenses) which include R&D (Research and

Development) as the companys fix cost; the third and last assumption was that we

used COGS (cost of goods sold) instead of acquisitions in order to calculate the

average payment period.

After explaining this, is important to evidence that the DuPont analysis reaches 3 areas

that may explain the ROE:

The operational efficiency of the company (profitability);

The degree of efficiency in the use of company assets (productivity);

Financial leverage (capital structure).

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50,00

100,00

150,00

200,00

250,00

Share Price at 31st

December


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The two best and better connected ratios with the concept of profitability are the Gross

Margin and the breakeven point.

For the first one, when calculated in percentage we notice that the percentage

increases every year, maybe that happen due to the economies of scale effect after

the increase of general sales/revenues.

For the Break-even point, it is interesting to relate it with sales, in order to know if we

reached the break point or not. By looking at the following graphic, we can definitely

see that there a tendency of increase of both variables because TESLA was investing a

lot and although their margin increased a lot, their fix cost increase more than that

previous growth leading to negative EBITs (operational profits) in all the analysis years.

In the productivity area, is important to focus on the cash cycle and its components.

We should go through the average holding period, the average payment period and

the average collection period. However, as the company was not in a stable period,

having tremendous high growth rates all these ratios are not meaningful because they

variate a lot and go up and down every year almost. It is not possible to infer any

0%

10%

20%

30%

2012 2013 2014

Gross Margin %

0

1000

2000

3000

4000

5000

6000

7000

2010 2011 2012 2013 2014

break even point

sales


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conclusions from this area. Even so, TESLA must take into consideration that they must

control this area otherwise they will have problems with their working capital. They need

to extent they payment periods and decrease they collection with clients by

negotiating with suppliers and clients, respectively.

On the leverage/liquidity area, it is important to say that TESLA is a company in a goodsituation because it has mostly equity capital and not debt capital to fund their

activities. Most of the liabilities are due to taxes because TESLA had losses in the

previous years and that has a distortion effect in the analysis. Therefore, they have also

good performance on liquidity because they need a lot of cash to invest in R&D in

order to develop their product. For example, the cash ratio is always higher than 1 and

sometimes really a lot above that limit.


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5. TESLA VALUATION5.1. Cash Flow Analysis

After the previous examination of the companys background and recent financialratios we are now entering into the main objective of this assignment, which is the cash

flow analysis. Cash flow is very important and it is the main source to elucidate about

the value of the company and its liquidity.

When we were evaluating this company we had to take in consideration so many

aspects and inputs that we will explain later. First we started by calculating the previous

years cash flows and only then we forecasted the following years with assumptions

made by us.

5.1.1. Previous Years Cash Flows

We decided it was better to analyse the years 2010, 2011, 2012, 2013 and 2014 for us to

have a pretty large sample of the company recent past.

For the calculus of the Free Cash Flow to the Firm (FCFF) the formula used was:

FCFF=EBIT*(1-T)- Working Capital Net Capex

The EBIT was found by subtracting to the Revenues the Costs of goods sold including

depreciations and amortizations and the Selling, general and administrative expenses

which is composed mainly by research and development. The EBIT could have been

calculated just by subtracting the cost of sales to the revenues but in this case we

found our way just more correct because this company invests a lot in R&D.

Then we needed the variation of the working capital, so we calculated the variations in

the receivables and in the payables and also the variation in inventories. The first year,

in this case 2010 is orphan of that because for the variations we need the values for n-1.

For the Net Capex we reached the variation in fixed assets between n and n-1, just to

know the investments of the company and then summed the amount of amortizations

and depreciations.

2010 2011 2012 2013 2014EBIT -146,84 -251,49 -394,28 -63,63 -211,93

-Taxes on EBIT 0,0001% 0,0002% 0,00003% 4,0704% -11,5132%

+ Working Capital - -19,46 -11,52 93,54 316,83

- Inventory - 4,90 218,42 71,86 613,32

- Accounts Receivable - 2,83 17,30 22,27 177,49

+ Accounts Payable - 27,19 247,24 0,59 473,98

+Depreciation Costs 10,62 16,92 28,83 106,08 231,93

-CAPEX - 198,19 269,05 586,53 1 586,08

FCFF - -413,30 -622,98 -635,03 -1 907,31


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As we can see by the table above Tesla is still not generating profit and that is

explained by the great amount of R&D included in the EBIT calculation and then by the

large volume of CAPEX.

We are looking to a company in an early stage of its life and thats proved by the large

variations in the inventories, accounts receivable and accounts payable.

Another thing that pops to the eye is the tax rates that is explain because of the losses

of the company and the tax shields. In the last year of 2014 the company paid

negative taxes, in other terms received money instead of paying. That is explained

once more by tax shields due to their losses and then the green energy credits that the

government grants.

5.2. Projection of Future Cash Flows

2015 2016 2017 2018 2019

EBIT 308,11 1 042,43 2 379,68 4 814,03 8 520,31

-Taxes on EBIT 0% 35% 35% 35% 35%

+ Working Capital 216,08 -475,58 -196,59 -372,86 -724,22

- Inventory 465,25 564,87 782,81 1 009,76 1 453,55

- Accounts Receivable 108,02 181,17 279,25 430,43 663,47

+ Accounts Payable 357,20 1 221,61 1 258,65 1 813,06 2 841,24

+Depreciation Costs 234,00 384,24 555,21 751,91 980,24

-CAPEX 1 903,30 2 283,96 2 740,75 3 288,90 3 946,67

FCFF -1 577,26 -746,56 -442,15 964,99 3 295,99

In this section we will explain our assumptions in the calculation of the future cash flows

of Tesla for the next 5 years.

In order to estimate the EBIT, we had forecasted the difference between estimations of

the revenues to the cost of goods sold, the depreciations and amortizations, and finally

the selling general and administrative costs. We think that the future revenues will

continue to increase in a fast pace in Tesla, the company is still in an developing stage

of its life and it is in a sector with very high potential (electric cars sector) which is very

hot topic but has a low penetration in the market. Other major factor is the recovery of

the strongest economies and the awareness of the consumers for environmental issues.

But for us to have a more numerical prediction we decided to use the production

capacity of the future Gigafactory (500 000 cars per year), that is being build, as a

reference for the grow rate of the revenues. For common sense we assumed that only

75% (375 000) of the cars that will be produced by the Gigafactory will be sold and

because Tesla is delivering right now 55.000 cars the rate of grow for the revenues has

to be 46,8% each year to reach the 375 000 number at 2020.

The cost of sales was estimated using the ratio Cost of Sales/Revenues, we started at a

value similar to the last years and decrease it a little year by year trying to emulate the

scale economies caused by producing a lot more unities.

Also by the same principle (economies of scale) the selling general and administrative

expenses, which are sort of fixed costs, have a decreasing rate of grow because the

fixed costs of a company should not rise at the same proportion of its sales, the

economy of scale enables the company to diminish the cost per unit because the

same fixed costs are being divided by more units.


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Growth in revenues 47% 47% 47% 47% 47%

Revenues 4 697,60 6 896,08 10 123,44 14 861,21 21 816,26

Cost of sales 2 959,49 4 137,65 5 770,36 7 876,44 10 908,13

Cost of Sales/Revenues 63% 60% 57% 53% 50%

SG&A Expenses 1 430,00 1 716,00 1 973,40 2 170,74 2 387,81

SG&A Expenses 30% 20% 15% 10% 10%

For the tax rate we assumed that in 2015 even though Tesla has positive EBIT would pay

0% due to the shields allowed by having losses in the last three years, in the following

years as the companys EBIT continuesto be positive the company will pay 35%.

2015 2016 2017 2018 2019

EBIT 308,11 1 042,43 2 379,68 4 814,03 8 520,31

-Taxes on EBIT 0% 35% 35% 35% 35%

In order to reach the CAPEX for the transition period between 2015 and 2019 we

applied a rate of grow of 20% that seemed acceptable to us and compatible with the

reports and previews we saw about Teslas investments such as the factory, their new

model 3 and new projects that can appear. In a company so focused in innovation

and technology the CAPEX has to be high and to grow from year to year because

thats what keeps the company moving and improving.

With no reasons otherwise our decision was to keep the amortization rate constant and

equal to the year of 2014. In our way of viewing things this is not such an important

driver for the future of the company.

Fixed Assets 4 269,30 6 169,01 8 354,55 10 891,54 13 857,97

CAPEX 1 903,30 2 283,96 2 740,75 3 288,90 3 946,67

Depreciations and

Amortizations

234,00 384,24 555,21 751,91 980,24

Amortizate rate 9% 9% 9% 9% 9%

Net Capex 1 669,30 1 899,72 2 185,53 2 536,99 2 966,44

The process of reaching the variation of the working capital was somehow more

complex because we introduced some variables in order to not come up with made

up numbers.

The average holding period in our model is constant around the value of 2014, the

average collection period is growing at a rate of 5% a year to simulate the more trust

put in the consumers and average payment period is growing at 10% a year to

symbolize the rise of Teslas negotiation power with suppliers.

The accounts receivable was the result from the Revenues plus the ACP/365 and the

accounts payable was the result from the Cost of Sales plus the APP/365.

In the same logic the Inventories were calculated by multiplying the Cost of Sales for

the AHP/365.

We noted that our working capital becomes negative as a result of our cash cycle, the

ACP grows a lot less than the APP for the reasons mentioned above so its normal thatthe working capital variation and absolute values being negative.


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Working Capital 2015 2016 2017 2018 2019

Inventory 1 418,93 1 983,80 2 766,61 3 776,38 5 229,92

AHP 175,00 175,00 175,00 175,00 175,00

AHP/365 0,48 0,48 0,48 0,48 0,48

Accounts Receivable 334,62 515,79 795,04 1 225,47 1 888,94

ACP 26,00 27,30 28,67 30,10 31,60

ACP/365 0,07 0,07 0,08 0,08 0,09

Accounts Payable 1 135,15 2 356,76 3 615,41 5 428,47 8 269,70

APP 140,00 154,00 169,40 186,34 204,97

APP/365 0,38 0,42 0,46 0,51 0,56

Working Capital 618,41 142,83 -53,76 -426,62 -1 150,84

inventories 465,25 564,87 782,81 1 009,76 1 453,55

accounts receivable 108,02 181,17 279,25 430,43 663,47

accounts payable 357,20 1 221,61 1 258,65 1 813,06 2 841,24

Working Capital 216,08 -475,58 -196,59 -372,86 -724,22

5.3. Weighted Average Cost of Capital (WACC)

5.3.1. Transition Period Beta Estimation

For the beta estimation we calculated the D/E ratio using the value of the Debt

subtracted by the value of the Cash and Short-term investments. We know the right

thing to do was to use the market value of debt but with the impossibility of getting it

we used as a proxy the book value of debt.

The next step in the formula was to use the beta unlevered of the sector, in this case wetried with the beta unlevered of the sector Auto & Truck (the sector in which Tesla is

included according to their annual report) but due to the Teslas low value of Debt,

more less 2% of its equity, the levered beta result was too l ow and consequently the

final cost of debt (kd) was higher than the cost of equity (ke). So we decided to use the

beta levered of the sector instead of the unlevered, this way in our opinion the analysis

becomes more realistic and correct. After that we incorporated the tax rate of 0%

considering that in the end of 2014 the company was not profitable.

With all that done we finally get the value of the Beta Levered

2014

Number of shares 124,54

Price per Share 222,41

Market Capitalization 27 698,94

Debt 562,13

D/E 2,03%

E/(D+E) 98%

D/(D+E) 1,99%

Beta Unlevered Auto & Trucks 1,09

D/E 2,03%

Tax Rate 0%

Beta Levered - Bottom Up 1,112120762


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5.3.2. Transition Growth WACC estimation

In order to get the WACC, the weighted average capital cost, of the company for the

transition period we need to utilize the CAPM model (Capital asset pricing model) so

we can reach the cost of equity (ke) then risk free asset and rating to reach the cost of

debt (kd).In the CAPM model for the risk free asset we used the United States bond 30 years

because it is the longest available and the USA are, by far, Teslas biggest market. The

risk premium was the one for the United States for the same reason and the beta

levered was the one calculated earlier.

For the rating we used the same risk free asset, the US bonds 30 years and then we

based our analysis in an unsolicited valuation made by S&P which gave Tesla a B-

rating grade and this grade corresponds nowadays to a 5% default spread.

With cost of equity and cost of debt calculated we finally reached the WACC for the

transition growth period.

CAPM

Rf - US Bonds 30y 2,75%

Risk Premium 5,75%

Beta 1,112120762

Ke 9,14%

RatingRf - US Bonds 10y 2,75%

Rating B-

Default Spread 5%Kd 7,75%

WACC 9,12%

With the WACC already calculated we can now proceed to the calculation of the

Discounted Free Cash Flows

2015 2016 2017 2018 2019

EBIT*(1-T) 308,11 677,58 1 546,79 3 129,12 5 538,20

Depreciations and

Amortizations

234,00 384,24 555,21 751,91 980,24

CAPEX 1 903,30 2 283,96 2 740,75 3 288,90 3 946,67

Working Capital 216,08 -475,58 -196,59 -372,86 -724,22

FCFF -1 577,26 -746,56 -442,15 964,99 3 295,99

Kwacc 9,12% 9,12% 9,12% 9,12% 9,12%

Discounted FCFF -1 445,48 -627,02 -340,32 680,70 2 130,71


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5.3.3. WACC Stable Period

For the estimation of the WACC for the stable period we need to come up with the g,

the stable period growth rate and then recalculate the cost of debt and equity for the

long term.

To reach the g we used the formula Average ROA of the sector * EBIT Reinvestment

Rate, first with the reinvestment rate of the sector Auto & Truck and then with Teslas

historic reinvestment rate and with both of them the G was too high. We learned in

classes that if for a stable period the g is higher than the economy expected rate of

grow, in the long term the company would become larger than the economy,

therefore we decided to use as suggestion of the professor the g of 3%.

Once more we used the CAPM model with the risk free asset being the Us Bonds 30

years and the risk premium of the United States. The difference was the the beta that

was now 1 because we assumed that in the long term the companys risk meets the

market risk.

Using the same cost of debt calculated before we were no able to get the WACC forthe stable period.

Average ROA of the Sector (TTM) 7,5%

EBIT Reinvestment Rate - Auto and Truck 352,32%

Reinvestment rate - EBIT 40,49%

Growth Rate 3%

CAPMRf us bonds 10y 2,75%

beta 1

risk premium 5,75%

Ke 8,50%

Kd 7,75%

WACC 8,49%

Using the recently calculated G and WACC we are now able to calculate the FCFFn+1,

which in this case is for 2020 and the Terminal Value.

With the Terminal value we can now calculate its actual value, using the WACC of the

growth period.

Enterprise Value is now calculated by summing to the discounted value of the free

cash flows the terminal value.

To reach the firm value we have do deduct to the enterprise value the amount of non-

operating assets, which in Teslas case is the cash and other short term investments.

The Equity Value is nothing more than the firm value less the value of debt of the

company.

Dividing the equity value for the number of shares the company possesses gives us the

future value per share.


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Terminal Value 61 892,75

Actual Value of Terminal value 40 010,93

Enterprise Value 40 409,52

Firm Value 40 236,36

Equity Value 38 386,36

Share Value 308,23

5.4. Sensitivity Analysis

The sensitivity analysis is very important for a company to observe the changes that a

variation on the growth rate or on the weight average cost of capital might create on

the share values and in the enterprise value.

Share Value

WACC'

6,49% 6,99% 7,49% 7,99% 8,49% 8,99% 9,49% 9,99% 10,49%

2,00% 375,62 336,67 304,82 278,29 256,05 236,61 219,94 205,36 192,50

2,25% 399,54 356,02 320,80 291,72 267,52 246,50 228,58 212,97 199,26

2,50% 426,46 377,52 338,39 306,38 279,96 257,16 237,83 221,09 206,43

2,75% 456,99 401,56 357,82 322,44 293,47 268,67 247,77 229,76 214,08

g 3% 491,88 428,61 379,43 340,10 308,23 281,14 258,48 239,06 222,23

3,25% 532,16 459,27 403,58 359,63 324,38 294,70 270,04 249,04 230,94

3,50% 579,18 494,33 430,75 381,33 342,16 309,50 282,57 259,80 240,28

3,75% 634,77 534,80 461,56 405,59 361,82 325,70 296,19 271,41 250,31

4,00% 701,53 582,04 496,78 432,90 383,67 343,53 311,05 284,00 261,12

As we can observe the Tesla is sensitive to these changes, by keeping the actual

growth rate of 3% and increasing the WACC on 0.5% the price of the share willdecrease to 281.14, in another way a decrease in the WACC will provide an increase of

the share value being it of 340.1 per share.

By making the same analysis, it means by doing a variation of the growth rate in the

same proportion as before we made in the WACC and by maintaining constant the

WACC we can see the same variation as before. For example WACC of 8.49% and

growth rate of 2.75% it will imply a decrease of the share value, it actually makes sense

because if the company starts to grow a lower rate the share price that people are

willing to pay will be also lower. Otherwise we can see the inverse situation when the

growth rate increases, the share value will also rise.


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By looking at these variations, we can conclude that the both variations (growth rate or

WACC) have the same influence (increase or decrease) in the share value, but the

variation of WACC has more impact in the share value rather than the growth rate.

As we can see in the table above, the worst scenario that the company could have to

face is when the WACC is of 10.49% and the growth rate of 2% - the share value wouldbe 192.5. In the best scenario, when the WACC will be 6.49% and growth rate 4%, the

share value would be 701.53.

5.5. Relative Valuation

The relative valuation, also known as multiple valuation, is another method to estimate

a companys value besides the discounted cash flow. It is probably the most used

method because it is basically the comparison between a company and its peers of

some financial ratios. So, it is very simple to apply. In this method the way of valuating a

company bases on the idea that an assets value is calculated from the pricing of

similar/comparable assets. This can be expanded to companies, emerging the relativevaluation. It assumes there is stability and that the stock exchange markets are efficient,

so that they reflect on the assets their intrinsic value. In other words, it admits that

market, on average, correctly value those similar/comparable assets.

In the case of TESLA, first we started to think which its main competitors are. We needed

to choose companies from the same sector and with a similar size. For the first criteria is

easy to pass because there are many companies in the automotive industry but for the

second one it is difficult because most of the car manufactures are mature companies,

with gigantic number and TESLA can be seen as a startup in this specific industry. The

problem gets even bigger if we think about the product itself because most of the

comparable companies also produce non electrical cars and this may distort theanalysis. Even so, we choose: General Motors, Toyota, BMW, Ford Motors, Kandi

Technologies Group and Volkswagen. From these 6 competitors, just Kandi is an only

electrical car producer. That is the reason why we choose it besides all the other 5 well

known car manufactures. The size of these companies may be not the most similar to

TESLAS but if we had followed this criteria in a very strict way, we would not have found

any company.

The next step was to use standardized variables that make values comparable. In order

to do so, we choose the following ones: PER (Price Earnings Ratio), PBV(Price Book

Value), EV/EBIT (Enterprise Value / Earnings Before Interest and Taxes) and the Tobin-q.

To calculate the ratios, we immersed into the internet to find some initial indicators: totaldebt, market capitalization (calculated by number of shares outstanding* Share price

on the 31/12/2014), EBIT, Net Income, and the total equity book value.


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Company Total Debt Market Cap N of Shares Out. EBIT Net Income Share Price 2014 Equity BV

TESLA 4880 27699 124,54 -212 -294 222,41 912

GM 141650 56205 1610 4 649 3949 34,91 35457

Toyota 258008 197004 1570 23 894 17703 125,48 139989

BMW 142025 54222 602 10 879 7016 90,07 45123

Ford Motors 183380 60450 3900 5 139 3187 15,50 24805

Kandi 111 658 46,95 18 166 547 14,01 212

Volkswagen 261020 12707 295,08 11 921 10985 43,06 105483

After having this data we begun to calculate the ratios by the following way:

PER=Price/(Earnings per Share)

PBV=(Market Capitalization)/(Book value of Equity)

EV/EBIT is the ratio itself

Tobin-q=(Market Value of Equity+Market Value of Debt)/(Book Value ofEquity+Book Value ofDebt)

Note: in the Tobin-q, we used the Book Value of Debt as a proxy of the Market Value of

Debt

Company PER PBV EV/EBIT Tobin-q

General Motors 14,23 1,59 42,56 1,12

Toyota 11,13 1,41 19,04 1,14

BMW 7,73 1,20 18,04 1,05

Ford Motors 18,97 2,44 47,45 1,17

Kandi Technologies Group 1,20 3,11 0,04 2,38

Volkswagen 1,16 0,12 22,96 0,75

Average 9,07 1,64 25,02 1,27

Median 9,43 1,50 21,00 1,13

TESLA -94,20 30,38 -154 5,62

After calculating these ratios to all the 6 peers (we even did it for TESLA just to have an

idea of the results), we calculated the TESLAs share value according to not only, the

average but also the median of the 6 peers. Although we calculated for both (we did it

just to see if there was any big difference), for us using the median is a better procedurebecause it reduces the effect of possible outliers.

TESLA's share value according to: PER PBV EV/EBIT Tobin-q

Average -21,41 12,03 81,75 19,79

Median -22,26 10,95 74,92 13,38

Analysing the results, for the PER the conclusions are not applicable because TESLA's

Net Income is negative and this distorts the result. A similar problem also shows up with

the EV/EBIT ratio that is also not applicable because TESLA's EBIT is also negative and thismay distort the final result. For the PBV and Tobin-q, the analysis is not useful for a


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correct reasoning because the other companies are very stable and mature when

compared with TESLA which is in an early stage of its life with high growth rates. Besides,

competitor companies have not a very useful similar size, in order to make a reliable

comparison between them and TESLA. Even so, there is not any company like TESLA

with a similar size and characteristics beyond Kandi but that one is not so innovative.

After all, we can see that TESLA (having on the 31/12/2014 a share price of 222,41dollars),has a much higher share price, so we could say that TESLA is over valuated. But

this may be explained by the start-up, fancy and trendy status of its electric car

product and also the recent past high growth rates.

In one hand, we could have stopped at this stage of analysis but we would need to

take into account that we are assuming, for the PER multiple, for example, the variables

that affect it such as: pay-out ratio, expected growth and risk or cost of equity; are

constant. On the other hand, we can adjust for differences and try to use some

components of each multiple to explain some of the differences in the multiples. For

each multiple we needed to get some data of the components on internet. After

having that we estimated a regression (using the Eviews8 computer program) for eachmultiple, in order to try to explain the differences:

Company PER Payout Ratio

(+)

Risk or Cost of Equity / (KE) (-)

Exp Growth (+)

GM 14,23 0,46 1,44 0,16

Toyota 11,13 0,27 0,54 0,09

BMW 7,73 0,38 1,26 0,10

Ford Motors 18,97 0,60 0,97 0,08

Kandi 1,20 0,00 1,81 0,18

Volkswagen 1,16 0,22 1,96 0,13

For the PER, although we were expecting the R-squared on relative valuation

regressions to almost never be higher than 70% and it is common to see them drop to

30 or 35%, it was interesting that it was around 95% and this gives us the notion that the

coefficients are meaningful. As expected, the pay-out ratio and the expected growth

rate have a plus (+) signal and also the risk has a minus (-) signal. As the final results ofthe coefficients are so high, they may explain the differences in the multiples but the


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expected growth rate is the one that may explain the most because it has the highest

coefficient.

For the PBV, we got a R-squared around 25%, as expected. So we cannot be sure

whether the coefficients are meaningful or not. As expected, the pay-out ratio, the

expected growth rate and ROE have a plus (+) signal and also the risk has a minus (-)

signal. Of all coefficients, the expected growth rate may be again the one that

explains the most differences because it has the highest coefficient.

Company EV/EBIT Exp

Growth (+)

Capex needs (-)

in million dolars

Capital Structure

(+/-) D/E

Risk or Cost of Equity /

(KE) (-)General

Motors

42,56 0,16 11867,00 2,52 1,44

Toyota 19,04 0,09 21788,00 1,31 0,54

BMW 18,04 0,10 6110,00 2,62 1,26

Ford Motors 47,45 0,08 7463,00 3,03 0,97

Kandi 0,04 0,18 69,00 0,17 1,81

Volkswagen 22,96 0,13 13916,00 20,54 1,96

Company PBV Payout Ratio

(+)

Risk or Cost of

Equity / (KE) (-)Exp Growth (+) ROE (+)

GeneralMotors

1,59 0,46 1,44 0,16 0,07

Toyota 1,41 0,27 0,54 0,09 0,09

BMW 1,20 0,38 1,26 0,10 0,13

Ford Motors 2,44 0,60 0,97 0,08 0,05

Kandi 3,11 0,00 1,81 0,18 0,83

Volkswagen 0,12 0,22 1,96 0,13 0,86


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For the EV/EBIT, we got a R-squared around 18% that is even lower than the last one but

t is still as what we were expecting. So we cannot be 100% sure whether the coefficients

are meaningful or not. As expected, the capital structure and the expected growth

rate have a plus (+) signal and also the risk and capex needs have a minus (-) signal. Ofall coefficients, the expected growth rate may be again the one that explains the most

differences because it has the highest coefficient. However, we can infer that the

capital structure of a company ( Debt/Equity ratio) in inversely related to the EV/EBIT.

So, maybe the company is behind the optimal capital structure mix point and possibly if

with leverage more the company, it well get more profitable with a better WACC.

Company Tobin-q Expected

Growth Rate (+)

Capital Structure

(+/-) D/E

Risk or Cost of Equity /

(KE) (-)ROA (+)

General

Motors

1,12 0,16 2,52 1,44 0,02

Toyota 1,14 0,09 1,31 0,54 0,04BMW 1,05 0,10 2,62 1,26 0,04

Ford Motors 1,17 0,08 3,03 0,97 0,01

Kandi 2,38 0,18 0,17 1,81 0,71

Volkswagen 0,75 0,13 20,54 1,96 0,04

For the Tobin-q ratio, we got a very interesting R-squared a little bit above the 99%,

which could lead us to good expectations on the predictive power of the regression.

But, very surprisingly, the expected growth rate component got a negative coefficient

in the estimation which contradicts all the previous estimations that set up that


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component as being to most correlated one. Even so, it is not a strong negative

component as is almost reaches zero. There is not any other component that stands out

from all the other ones from its final result.

To summarize, probably the expected growth rate is the component from all the

multiples that better explains the differences between the multiples.

5.6. Bankruptcy Risk

Companies are in bankruptcy risk when they will not be able to meet their debt

obligations. This risk describes the probability that a company will become insolvent due

to its incapacity to service its debt. To analyse the position of the company, we had to

use the Altman Z-score test. This test is based on five financial ratios:

T1 = Net current assets / Total Assets

T2 = Cumulative retained Earnings/Total Assets

T3 = EBIT/Total Assets

T4 = Market capitalization/Total Liabilities

T5 = Sales /Total Assets

When we obtained values for these ratios is necessary to multiply them by the

respective coefficients, as shown in the following formula:

Z-Score=1.2*T1+1.4*T2+3.3*T3+0.6*T4+0.999*T5

Substituting the letters for values we obtain the z-score value for the company.

2010 2011 2012 2013 2014

Current Assets 235,89 372,84 524,77 1270 3200

Current Liabilities -85,57 -191,34 -539,11 -675,16 -2110

Total Assets 386,08 713,45 1110 2420 5850

T1 = Net current assets / Total

Assets0,47 0,31 -0,02 0,29 0,22

Retained Earnings -414,98 -669,39 -1007,00 -1140,00 -1430,00

T2 = Cumulative retained

Earnings/Total Assets-1,50 -1,31 -1,27 -0,66 -0,34

EBIT - 146,84 -251,49 -394,28 - 63,63 - 211,93

T3 = EBIT/Total Assets -1,26 -1,16 -1,17 -0,09 -0,12

Market Capitalization2

527,452

867,143

635,9417

963,1627

698,94

Total Liabilities 179,03 489,4 989,49 1750 4880

T4 = Market

capitalization/Total Liabilities8,47 3,52 2,20 6,16 3,41

Sales 116,74 204,24 413,26 2010 3200

T5 = Sales /Total Assets 0,30 0,29 0,37 0,83 0,55

Z-Score Compass 6,48 1,63 0,12 6,54 3,71

Looking at the next table, it is possible to see that Tesla is on the Safe Zone because its

Z-Score is equal to 3.71.


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Z > 2.99 Safe Zones

1.81 < Z < 2.99 Grey Zones

Z < 1.81 Distress Zones

If we pay attention to the previous values of Tesla Z-score, we can conclude that Tesla

had passed through the three zones, but in 2014, was in the Safe Zone. So, we can

conclude that Tesla isnt likely to go bankrupt within the next two years.

5.7. Monte Carlo Simulation

Monte Carlo Simulation is used frequently in different fields as in finance, insurance,

project management, and so on. It is a method that simulates different variables thatcreates uncertainty by creating interactions in the Enterprise Value and in the Share

Value. The Monte Carlo simulation was performed through the Crystal Ball application

for Excel. The variables that we have used to test were the FCFF for each year, growth

rate, WACC and WACC; because we think that theseare the changes in these

values can affect directly the enterprise value and the share value. In our nine tested

parameters we have assumed that they will follow a normal distribution. So that in the

next charts we will present the distributions that we got.

FCFF

The FCFFs coefficient, mean and standard deviation for each year were obtained

through the Monte Carlo simulation and can be observed in the excel attach to

valuation.


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Perpetual Growth Rate WACC WACC

Mean: 3%; Standarddeviation: 0,3%

Mean: 9,12%; StandardDeviation: 0,91%

Mean: 8,84%; StandardDeviation: 0,85%

Based on this nine assumptions, Crystal Ball performed one million trials, in order to

provide the best approximation to the real probability distribution that the value of the

company and shares.

Using this assumptions and with a certainly level of 95 %, we arrive to the conclusion

that Tesla value varies from 28 114,61 to 62 004,98 and the value with more probability

of happening is 41 588,24 which is very close to our estimation (40 409,52).


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Using the same assumptions and certainly level, we conclude that Teslas Share Value

varies from 209,50 to 481,63 and the value with more probability of happening is 317,68

which is once again very closer from our calculations308,22.

With the values that we got for the mean values of the share price and for the

enterprise value we can observe that they are very similar to the values that we gotduring our valuation, so we can assume with some certainty that our analysis is reliable.


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6. REFERENCES

Brando, Elsio; Finanas, 6 Edio, 2012

http://ir.teslamotors.com/

http://people.stern.nyu.edu/adamodar/

http://www.bloomberg.com/

http://finance.yahoo.com/

http://evobsession.com/

http://www.marketwatch.com/

http://www.reuters.com/
http://ir.teslamotors.com/http://evobsession.com/http://www.marketwatch.com/http://www.marketwatch.com/http://evobsession.com/http://ir.teslamotors.com/

Documents

Tesla financial analysis