TESLA Group 7 Final
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TESLA VALUATION MFIN 823 GROUP RESEARCH PROJECT
GROUP 7Mark Moskvitine
Liya PanBadri Varadarajan
Chen Zhou
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2
OVERVIEW
MARKET PRICE: $256.76/share*
TARGET PRICE: $216/share
RECOMMENDATION: SELL
* As of Aug 19, 2014
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3
BUSINESS
- Incorporated in 2003, went public in 2010 (last US car-maker IPO was Ford)
- Designs, develops and manufactures fully-electric cars and powertrain components for vehicles
- Tesla Roadster, first produced in 2008, was the first vehicle to use Lithium-Ion cell
TESLA ROADSTER
TARGET PRICE: $216
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4
BUSINESS
- Other models include: - MODEL S (sedan)- MODEL X (SUV crossover to launch in 2015)- GEN III (high-volume car to launch in 2017)
- Tesla acts as OEM for other car-makers (strategic alliances with Daimler and Toyota)
- No dealerships; sells cars directly- Plans huge investments in partnership with
Panasonic (Li-Ion batteries)TESLA MODEL S
TARGET PRICE: $216
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INDUSTRY
- Major players include: Nissan, GM, Tesla, Mitsubishi, Renault and Toyota
- Electric car market in its early state, but growing; represents only a small fraction of the overall auto market
- Electric cars are further classified into:- Hybrid electric cars- Plug-in hybrid electric cars- Battery electric cars
TESLA MODEL S
TARGET PRICE: $216
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INDUSTRY
- Some of key drivers of growth will be:
- Gov’t support and subsidies
- Increase in fossil fuel prices
- Improved battery technology
- Increased trends towards sustainable development
- Lower operating and maintenance cost
TARGET PRICE: $216
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INDUSTRY
- Some of key challenges will be:
- High purchasing cost
- Limited driving range
- Absence of developed recharging infrastructure
- Real/perceived reliability and safety concerns
- Reducing battery cost
TARGET PRICE: $216
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SALES PRICE
- MODEL S: 2013 average price of $86,700 ($85,000 + 2% options)
- MODEL X: 2015 estimated starting price of $76,800 ($71,090 MODEL S starting price + 8% SUV premium)
- GEN III: 2017 estimated starting price of $35,000
- Prices will increase with inflation2014 2015 2016 2017 2018
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
Model S Sales Price Model X Sales Price Gen III Sales Price
TARGET PRICE: $216
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SALES VOLUME
- TESLA sales expected to converge to 30% per annum, versus 20% compound global EV sales growth
2014 2015 2016 2017 20180.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
Model S Sales Volume Growth
Model X Sales Volume Growth
Gen III Sales Volume Growth
TARGET PRICE: $216
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SALES VOLUME
- 20,000 units: Initial annual target production for MODEL X
- 25,000 units: Estimated initial annual sales for GEN III
2014 2015 2016 2017 20180
20
40
60
80
100
120
140
Model S Units per yearModel X Units per yearGen III Units per year
TARGET PRICE: $216
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WORKING CAPITAL
- Days in A/P, A/R, Inv. expected to converge to competitor (BMW, Daimler) averages from 2014 to 2018
Days In 2013A 2014E 2015E 2016E 2017E 2018E BMW, DAI Average
A/R (days) 8.9 10.4 12.2 14.2 16.6 19.4 15.45
Inv. (days) 79.8 78.1 76.5 74.9 73.3 71.7 72.07
A/P (days) 71.2 65.0 59.4 54.2 49.5 45.2 45.05
TARGET PRICE: $216
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GROSS MARGIN
- 27.2%: estimated gross margin for 2014 (TESLA Financial Report)
- 47.5%: estimated steady state gross margin (Musk’s goal for exceeding Porsche’s gross margin)
- YoY Growth Rate: 20% except for 2015 and 2017
2014 2015 2016 2017 20180.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
50.00%
Gross Margin
TARGET PRICE: $216
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VALUATION
- $256.76/share: TSLA market share price as of Aug 19, 2014
- $216/share: Our price is a 50/50 blend of multiples-based analysis ($159/share) and DCF valuation ($273/share)
- 18.9%: discount from the current market price
TARGET PRICE: $216
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VALUATION
- DCF method: - 5-year high growth CF determined by projected Net Income- steady state growth terminal CF determined by EV/EBITDA Multiple
of 9.41x (2013 average of BMW and Daimler)- FCFF discounted by WACC of 10.93%
- Multiples method: based on 2013 average ratios for comparable car makers (luxury/high-growth)- P/E (10.99x, $395/share): most commonly used- P/S (0.96x, $138/share): used for negative NI, hard to manipulate
TARGET PRICE: $216
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FINANCIAL ANALYSIS
- SG&A/Sales Ratio: Very high in 2011 at 51% and 2012 at 36.4% due to operating inefficiency
- Improved in 2013 to 14.2% with economies of scale
- Expected to improve further with increased sales of MODEL S and launch of MODEL X in 2015 and GEN III in 2017
- 14.2%: SG&A/Sales used in forecasts as a conservative estimate
TARGET PRICE: $216
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FINANCIAL ANALYSIS
- $850m: average CAPEX management estimate for 2014
- $667m/year: TESLA’s expenditures related to Gigafactory
- $106m/year: maintenance/replacement CAPEX equalling Depreciation from 2016 onward
- New CAPEX is depreciated at the 2012/2013 weighted asset-class rate of 10.5%
TARGET PRICE: $216
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FINANCIAL ANALYSIS
- Income tax rate across profitable Auto & Truck firms is 28.35%
- Tesla’s rate is estimated to be 24% due to incentives for clean energy initiatives
- $1.13bn: operating loss carry-forward available for future income tax offsetting
TARGET PRICE: $216
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RISKS TO PRICE TARGET
- Price target is sensitive to our projected revenue growth
- Price target is sensitive to our chosen discount rate
-10% Growth Rate +10% Growth RateDefault Rate
$216/share$190/share $248/share
+1% to WACC -1% to WACCDefault WACC
$216/share$206/share $226/share
+32-26
-10 +10
TARGET PRICE: $216
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INVESTMENT RISKS
- 40% of Tesla’s long-term growth is expected to come from Asia
- Chinese consumers have a strong preference for established luxury brands such as BMW, Audi, and Mercedes.
- Even at $35,000 GEN III will not differ significantly from entry-level BMW models
TARGET PRICE: $216
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INVESTMENT RISKS
- Infrastructure development remains a limiting factor for Tesla’s growth
- Tesla could face very serious competition in the long term as ZEV are produced by well-established luxury brands
- Tesla’s is dependent on outside suppliers, many of whom are single-source
TARGET PRICE: $216
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CONCLUSION
- Despite early success Tesla has a long way to go towards the mainstream acceptance
- As a technology company Tesla may have a bright future, but as a car manufacturer it will face serious competition
- Promising technology and industry do not necessarily imply a long-lasting competitive advantage and positive abnormal returns for an individual company
TARGET PRICE: $216
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QUESTIONS
GROUP 7
Mark MoskvitineLiya PanBadri VaradarajanChen Zhou
TARGET PRICE: $216