Professional Documents
Culture Documents
4/30/2013
TABLE OF CONTENTS
Table of Contents
Who are they? ___________________________________________________________________________________ 1 Welcome to the Real-World, Mr. Musk_________________________________________________________ 2 The Oil Boom That Wasnt Supposed to Happen _____________________________________________ 5 A Government Love Affair ______________________________________________________________________ 6 Whats the Trade? _______________________________________________________________________________ 7
Bull Case _________________________________________________________________________________________________ 7 Bear case ________________________________________________________________________________________________ 8 Final Assesment ________________________________________________________________________________________ 9
Model S 60kWh, 85kWh, 85kWh (Performance Model) 230mi, 300mi, 300mi $70K, $80K, $95K 2,650
Figure 1: Tesla Motors current and future models12 In addition to selling vehicles, Tesla designs, produces and sells electric powertrain systems to Daimler for their EV series, as well as Toyota for their RAV4 EV. Both companies have done business with Tesla since 2010 and hold a combined 7.8mm shares in the company. Revenue from powertrain systems only accounted for 8.1% of total sales in 2012. Tesla Motors raised nearly $185mm, after fees, from their IPO in June 2010 when the company and insiders sold over 15mm shares. In 2011, Tesla received nearly $230mm from an additional stock offering nearing 8mm shares. There was another follow-on offering in late 2012 when roughly 8mm shares were sold, raising over $220mm in cash. There are approximately 114.5mm shares outstanding and 72.9mm in public float.
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millions $ Total Revenues Cost of Goods Sold Gross Profit Gross Margin % Total SG&A Operating Income Net Interest and Other Pre-Tax Profit Income Taxes EPS
Q1 2011 49.03 31.00 18.03 36.8% 65.37 (47.35) 1.49 (48.79) 0.15 (0.51)
Q2 2011 58.17 39.66 18.51 31.8% 77.25 (58.74) 0.07 (58.76) 0.14 (0.60)
Q3 2011 57.67 40.44 17.22 29.9% 81.70 (64.48) 0.59 (64.99) 0.09 (0.63)
Fiscal Quarters Q4 Q1 Q2 Q3 2011 2012 2012 2012 39.38 30.17 26.65 50.10 31.54 19.96 21.89 58.87 7.84 10.21 4.76 8.76 19.9% 33.8% 17.9% 17.5% 88.76 98.97 110.94 99.70 (80.93) (88.76) (106.18) (108.46) 0.50 1.08 (0.69) 2.19 (81.38) (89.81) (105.49) (110.69) 0.11 0.06 0.11 0.12 (0.78) (0.86) (1.00) (1.05)
Q4 2012 306.33 282.48 23.86 7.8% 114.74 (90.88) (0.75) (90.08) (0.15) (0.79)
Figure 2: Q1 2011 through Q4 2012 fiscal results3 As previously mentioned, the rate at which a startup spends cash is an important factor to consider. Since the COGS and R&D budget cause Tesla to run under a negative operating income, raising cash has been the only option recently. The company has sold millions of shares in follow-on offerings, paired with key partners in exchange for stock, and even taken out a $465mm loan with the U.S. DOE (discussed later). Though the offerings have resulted in much need cash, the dilution has been detrimental for balance sheet statistics. Also, the partnership with Toyota has resulted in a deal where Tesla is expected to receive $100mm from Toyota between 2012 and 2014, but the company is limited in the fact that it cannot continue to attract business in this manner. Furthermore, while the DOE loan was useful, it has already been fully drawn on. Tesla is now on the hook to comply with strict and increasing regulatory demands. Another cash option that is available to Tesla comes from their unique way of holding customer reservation deposits. For a customer to get a spot in line to receive a Model S or X, they must pay a $5,000 refundable deposit. Tesla notes that they use these funds for working capital and other general corporate purposes. 4
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2010 REVENUE
Asia
2012 REVENUE
Asia
Europe
North America
Europe North America
Figure 3: Tesla revenue by region, 2010-20125 Tesla plans to start their European deliveries for the Model S in summer 2013 and Asian deliveries in late 2013. It is important to note the changing dynamic in sales by region, especially as transportation costs are a much larger issue in Europe. Ford recently announced that they expect to reach profitability again in Europe by 2015, giving similar companies international hope. Though the company has only had one quarter of positive operating income, Mr. Musk made a public announcement on April 1st about Tesla reaching full profitability for Q1 2013.6 He said that Tesla sold more than 4,750 model S sedans, easily beating analyst expectations. There was no indication on how Tesla was able to dramatically increase the rate of actual sales. It should be noted, though, that Tesla recently asked numerous customers on the reservation list to configure their cars for delivery or risk losing their product
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Current estimates show that by 2020, the U.S. could surpass, or come close to, Saudi Arabias oil production levels10. If one of Mr. Musks initial goals in creating Tesla was to set the U.S. on a path to sustainability, then his dreams could seriously be derailed from an overproduction of oil, creating cheaper transportation costs. Though there is not nearly enough data to perform a regression analysis on fuel prices and Roadster/Model S sales, we can only assume that a consumer will choose the options that benefits their pocket the most.
Furthermore, natural gas prices have averaged out to roughly $4 over the past few years, leading many to believe natural gas could be the early savior to gasoline costs. However, a little over 100,000 vehicles in operation today in the U.S. (majority are buses and trucks) use natural gas. This is mainly due to the infrastructure needed to provide the fuel, newer vehicles needing to be installed with natural gas operating systems, as well as the knowledge to service such vehicles.
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Figure 7: Section 1705 of DOE ARRA loans14 Though Tesla Motors was not part of the ARRA program, the company did receive approval for a $465bn loan in 2010 as part of the ATVM incentive program. The other recipients of this program included Ford ($5.9bn), Nissan ($1.4bn) and Fisker ($529mm). Tesla had fully drawn down their entire loan by the end of August in 2012. In their 2012 10-K, Tesla noted that they had worked with the DOE to amend the funding requirements so that they may be able to make future payments. They had to remove their requirement for a current ratio greater than one in mid-October 2012, reduced their first pre-funding payment by 14.2mm (originally $28.8mm) and pushed it back from mid October 2012 to February 2013, as well as adding in a covenant promising to work with the DOE to create an early repayment plan. Six more financial ratio constraints begin in late 2013 and 2014, all of which Tesla is currently not in line with.
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Figure 8: TSLA 1-year stock performance15 The number of reservations has exponentially increased over the years. In 2010, there were 3,400 Model S vehicles reserved, while now there are at least 15,000 reserved. Also, the number of stores and service stations across the U.S. and internationally has grown to 32 and 29, respectively. Furthermore, Tesla has started to build its Supercharger network across the U.S. There are currently three locations, one in California and the other two on the East Coast. These stations allow only Tesla vehicle owners to charge their vehicle, which takes between thirty minutes to an hour.
15
http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=tsla&insttype=&freq=&show=
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BEAR CASE
With every pipe dream of a new technology comes the realization that the chance of failure is extremely high, especially in an industry that is already littered with cash-rich companies. While Tesla holds the slight competitive edge of EVs that can hold longer charges, its competitors are fighting their way into the space with a mix of Hybrids and EVs. Not only do companies like Ford and Chevrolet offer cheaper models, but they also help relieve consumers fear of running out of an electric charge while away from home.
Figure 9: Hybrid and EV cost comparison16 Despite its freshly minted IPO status, the company has yet to show that it can produce a profit. From an increasingly negative Free Cash Flow, to selling stock to raise cash and bring in new partners, to an increasingly worrisome situation with the DOE, Tesla is in a sticky situation when it comes to funding its future growth. Furthermore, managements ability to use depositors cash to essentially run day-to-day operations could provide serious issues going forward if the rate of reservations decline or there are delays in producing the Model X or third Generation vehicles (Model X has already been delayed by a year). In every 10-K, Tesla has mentioned that California, and possibly other states, has laws that restrict automotive
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http://www.toyota.com/prius-plug-in/compare.html#compare/summary/35287/33773/34103/35604
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FINAL ASSESMENT
With a list of growing competitors, bucket of sensitive customers who cancel reservations at the slightest bump in the road, high sticker prices and dry cash reserves, it is hard to justify the valuation that TSLA is trading at. With the average age of vehicles continuing to rise, the length of ownership dropping, brand loyalty remaining strong and the general poor economic condition many American families find themselves in, I find it difficult to see Tesla in the same, individual entity state three to five years down the line.17
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http://www.experian.com/assets/automotive/brochures/experian-auto-q4-2012-market-trends.pdf
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APPRECIATION
Appreciation
Thank you for taking a moment to read through my report. Performing deep fundamental analysis on equities is my passion and I love to share my findings with others. While I do my best to provide a broad overview of my investment thesis, I understand that I am young and still have a great deal to learn. Thus, I am always happy to discuss my analysis in further detail.
Sincerely,
Geoffrey Horton
Geoffrey Horton is a recent graduate of the Georgia Institute of Technology in Atlanta, Georgia with a B.S. in Industrial and Systems Engineering. While attending Georgia Tech, Geoffrey managed the largest student-run endowment in the nation with AUM exceeding $920,000. He has previously interned at A. Montag & Associates, a buy-side firm in Atlanta, as well as SMB Capital, a propriety trading firm in New York City.
The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author to be reliable, but the author does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security.
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