Pooja Paresh

Stephanie Blitshtein
Eyad Almasri

Dante Smith
Aishwarya Ravindran

Noor Alajami
Ammar Hussain

TESLA MOTORS, INC. (TSLA)

COMPANY DESCRIPTION
Tesla Motors, an American automotive and energy storage company, was founded in
2003, in Palo Alto, California. The company gained traction after its production of
the Tesla Roadster, the first electric sports car. The Model S, Teslas flagship electric
sedan, made its debut in 2012. Following the release of Model S, Tesla has
announced the Model X, a crossover SUV, and the Model 3, an affordable luxury
sedan. Elon Musk, the CEO, envisions Tesla eventually offering electric cars at costs
affordable to the average consumer. Initially, Teslas primary market targeted ecofriendly, upper-middle class families who could afford a $70,000 vehicle. With the
introduction of the new Model 3, Tesla is narrowing in on to their secondary market,
which consists of young professionals and mid-income families who are looking for
an affordable luxury car.

Pooja Paresh
Stephanie Blitshtein
Eyad Almasri

Dante Smith
Aishwarya Ravindran

Noor Alajami
Ammar Hussain

BUSINESS RISKS
The Tesla Teams largest risk factor stems from the fact that the firm is unlike any
other in the market. There is no one to set the precedent for an all-electric, luxury
model car company. This makes the risk of releasing new models that much greater.
As stated in Teslas most recently released 10-Q, the following are some of the
firms anticipated business risks summarized:
1. Complications in design and production of new vehicles, particularly
the manufacturing of high volumes anticipated for the Model 3
2. Delays in projected timelines of releases of cars, which could
potentially harm the business, financial condition, and operating results
3. Problems associated with having no prior experience in manufacturing
vehicles at high volumes
4. Teslas inability to maintain long-term contracts with a significant
number of our vendors. This exposes the firm to multiple avenues of issues,
including delivery failure and inventory shortages
5. The business growth is directly contingent on our consumers
willingness to be innovative, early adopters and embrace electric cars
Based upon a recent Business Insider article highlighting Teslas business
risks, a business risk not explored in the 10-Q is earthquakes. Teslas factory is
based in Fremont, California, which is in an earthquake zone. As seen in the various
disasters that struck Japan, it is clear that natural disasters have a significant
impact on automaking. When compared to its industry peers, the rest of the US
automotive industry does not operate out of locations prone to natural disasters.
Also, Tesla may be prone to some regulation risk if the electric car industry and its
safety becomes heavily regulated.

SWOT ANALYSIS
Strengths
Teslas primary strength is its unique position in the auto market. Although
Tesla is not the sole manufacturer of electric vehicles, it has pioneered the market
for luxury, long-distance electric automobiles. This specific niche has few
competitors. Not only is Tesla aiming to dominate their specific niche, but they are
targeting the auto market as a whole. Tesla hopes to replace the average gasolinepowered vehicle with the Model 3. Tesla has been growing exponentially over the

Pooja Paresh
Dante Smith
Noor Alajami
Stephanie Blitshtein
Aishwarya Ravindran
Ammar Hussain
Eyad Almasri
last 3 years, as the public is more and more receptive to all-electric cars. High sales
and extraordinary success were driven by worldwide demand for the Model S.
The Model 3, Teslas newest brand addition, is the perfect avenue for
opportunity and expansion. The lowered price puts the vehicle at the same range as
a lower-end luxury car. As of right now, Tesla manufactures around 80,000 cars a
year, and once the Model 3 is released, the number could increase tenfold in just a
few years. Secondly, for Tesla to begin displaying profits, it must bring down its
costs. Its investment in its Gigafactory, in Nevada, will allow for Tesla to
manufacture batteries in-house, reducing cost significantly. Teslas commitment to
lower costs while reporting increased efficiencies in distribution should help improve
the bottom line in the years to come.
Weaknesses
Tesla has been significantly burning through cash since its inception. This is
mainly attributed to their large investments in research and development, as well as
the effect of rapid growth it has seen, in just a few years. However, these cash
outflows have directly resulted in Tesla reporting negative free cash flows and
earnings every year since it went public. While their heavy spending has opened up
avenues for more growth opportunities, the negative free cash flows translate to the
company having to take on more debt or raise equity. Tesla has done the former and
has a relatively high debt load. As of March 31, 2016, Tesla had around 72% of its
total capital (2.43 Billion) as long-term debt and capital leases. If the company is
incapable of satisfying its debt obligations due to low cash inflows, this may disrupt
any future growth. A weakness Tesla faces includes the possibility that Tesla may
not be able to raise enough capital to fund its ambitious goals, set to narrow
timelines. The company will need to garner a significant amount of external capital
in order to succeed.
Opportunities
Oil and gas are exhaustible resources. The worlds dependence on these
resources causes the supply to diminish and diminish quickly. As oil and gas
becomes more scarce, the price of it will steadily increase. Owning a gas-guzzling
vehicle will no longer be affordable to the majority. The economy portrays trends of
a spike in sales of

low miles-per-gallon vehicles when gas prices drop and vise

versa. With Tesla only producing electric vehicles, the company has increasing

Pooja Paresh
Dante Smith
Noor Alajami
Stephanie Blitshtein
Aishwarya Ravindran
Ammar Hussain
Eyad Almasri
opportunity in the automobile industry. Electric cars are three times as efficient as
regular engine vehicles. Through new and efficient technology, electrical energy can
be stored in rechargeable batteries that run the car. There is no dependence on a
dwindling resource. As more information about the environment and electric cars is
revealed, Tesla hopes that more people will make the switch to electric cars to the
point where this type of vehicle dominates the auto market.

Threats
The inevitable competition of the automotive industry is a great threat to
Tesla. Despite being relatively unique in terms of its business model, Tesla faces a
double threat from both the high-end (Model S) and affordable (Model 3) auto
sectors. Once the lower-cost Model 3 is released to the market, it will face heavy
competition from the Nissan Leaf and the Chevy Bolt. Teslas positive outlook on
consumers embracing electric vehicles places it in competition with regular engine
auto manufacturers, as well. As information about electric vehicle technology is
more widely available, Tesla will be determined to attract car buyers towards their
green options as opposed to a standard vehicle, especially if the competing
vehicle is in the same price range. Most of Teslas competitors have been in the
automotive business for a very long time, and have greater manufacturing, capital
and marketing leverage. Tesla must prove its competence to compete on a larger
scale.

FORECAST FREE CASH FLOW

Pooja Paresh
Stephanie Blitshtein
Eyad Almasri

Dante Smith
Aishwarya Ravindran

Noor Alajami
Ammar Hussain

An assumption that we made when forecasting Teslas future free cash flows was to
take into consideration their net operating loss carryforward. Due to consecutive
years of net operating loss, we chose to shelter taxable income until 2020. In this
year, taxable income becomes subject to a 35% tax rate. All other information was
taken from the forecasted financial statements (Exhibits 3B and 3D). To calculate
Teslas cost of debt, the average coupon rate of their two current issues of
convertible bonds was used.

FIRM VALUATION

Pooja Paresh
Stephanie Blitshtein
Eyad Almasri

Dante Smith
Aishwarya Ravindran

Noor Alajami
Ammar Hussain

When a terminal growth rate of 4.8% is applied to our discounted cash flow model,
Teslas intrinsic value is $279.65 per share. Teslas all time high price per share is
$272. Given Teslas future revenue streams (Model 3, SolarCity, etc.), plans to
increase operational efficiency (Gigafactory), and innovative and visionary CEO Elon
Musk, our team believes that Teslas future in the long-term is bright and that 4.8%
is an appropriate terminal growth rate.

PEER GROUP
Company
Name

Trailing P/E

Daimler

8.04

BMW Group

7.41

Nissan

Forward P/E

PEG (5yrs)

EBITDA

1.976

16.38B

6.85

9.59

10.10; 12.94B

.09

7.00

.91

4.8; 1.15T

Toyota

.08

10.05

.31

2.59; 4.15T

Honda

.16

9.9

.55

4.08; 1.03T

Tesla is a large, electric-automobile manufacturer that has a large peer group. The
company not only specializes in electric cars, but also takes great pride in having
the best technology available for their customers. Teslas peer group consists of
auto manufacturers including Daimler (DAI) aka Mercedes-Benz, Ford Motors (F),
Nissan Motors (NSANY), Bayerische Motoren Werke AG (BMW), Honda Motors (HMC),
and Toyota Motors (TM). Tesla currently leads the automotive industry in the push

Pooja Paresh
Dante Smith
Noor Alajami
Stephanie Blitshtein
Aishwarya Ravindran
Ammar Hussain
Eyad Almasri
for a completely autonomous driving experience. Currently, Teslas autonomous
feature is known as Autopilot. Autopilot is an Advanced Driver Assistance System
(ADAS) that classifies as a Level 2 automated system by the National Highway
Transportation Safety Administration. It is designed as a hands-off experience to
give drivers more confidence behind the wheel, increase their safety on the road,
and make highway driving more enjoyable by reducing the drivers workload. This
great advancement in Tesla cars has triggered its peer group to heavily invest in
autonomous driving as well. For example, in order to compete with Teslas Model S,
the Mercedes-Benz S Class, the BMW 7 series, and the Q Model from Infiniti all offer
a less advanced version of Teslas autopilot. Although the competition already offers
less advanced versions of autopilot, the Model Ss MSRP begins at $66,000 whereas
the Mercedes and BMW both start around $96,000. Teslas competitors have
announced that they wish to have a fully autonomous car by early 2020s. Teslas
competition in the non-luxury, electric car market include cars such as the Nissan
Leaf and the Chevy Bolt.

FORECASTS

EXH
IBIT 3A

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Stephanie Blitshtein
Eyad Almasri

Dante Smith
Aishwarya Ravindran

EXHIBIT 3B

Noor Alajami
Ammar Hussain

Pooja Paresh
Stephanie Blitshtein
Eyad Almasri

Dante Smith
Aishwarya Ravindran

Noor Alajami
Ammar Hussain

EXHIBIT 3C
EXHIBIT 3D
In the 5-year forecast of Teslas income statement and the balance sheet, the
basis of many of the teams predictions derived from the level of growth from year
to year. For the first revenue forecast in 2016, the team used the latest 10-Q data
(third quarter) and assumed that Teslas fourth quarter performance would be the

Pooja Paresh
Dante Smith
Noor Alajami
Stephanie Blitshtein
Aishwarya Ravindran
Ammar Hussain
Eyad Almasri
same as their third quarter performance. We feel safe in making this assumption as
we expect their fourth quarter performance to be similar to third quarter
performance. Elon Musk has indicated that Tesla believes they will have a profitable
fourth quarter, and also highlighted the fact that their third quarter performance
was the first time they have been profitable in over three years.
According to Yahoo Finances analysts, the growth rate for the next 5 years
(per annum) for Tesla is 35%. The team took this into account in the balance sheet
and income statement and projected revenues including Teslas current two
vehicles, the Model S and Model X, to increase by 35% each year. In the exhibits
above, the increase from year to year in 2013, 2014, and 2015 seem to match this
assumption well. On top of this 35% baseline, the team added our expectations for
Model 3 sales and also revenue that Tesla expects to receive in the future from their
SolarCity acquisition. Additionally, the team makes the assumption that Tesla will be
able to cut their expenses over the next five years by lowering their selling, general,
and administrative costs and also benefiting from economies of scale in their
Gigafactory which was opened this year. Compared to the industry standard of our
peer group, which is 9%, Tesla is projected to grow immensely in the next few years.
While researching the data from the past three years, the team also found
that many parts of the financial statements when looked at as a percentage of the
total revenue were consistently similar numbers in the past three years. The team
also looked at the income statement and balance sheet of Daimler, Nissan, and
BMW. The findings were similar in terms of their capital structure. We did notice that
some of the percentages that we were using were slightly varied when compared to
those of our peer group for a few key parts of the balance sheet. For example,
Teslas inventory as a dollar amount is on average 26% of the total revenues,
whereas Nissan, Daimler, and BMW have on average 12% of the total revenue
amount
as
inventory.
However, despite the similar capital structure of our peer group, we found
that it was more accurate and intuitive to project most of Teslas financials as a
percentage of their sales based on their historical performance (with the exception
of the selling, general, and administrative costs) rather than altering the
assumptions based on the peer group. This was our justification in projecting the
cost of goods sold, cash, inventory, and other components of the financial
statements as a percentage of total revenue.
Increasing Sales
The team believes Tesla will substantially increase their revenues in the future with
the inception of the Model 3 and the acquisition of SolarCity. Model 3 pre-orders
currently number almost 400,000 according to recent estimates and production is
slated to begin mid to late 2017 (Welch). To arrive at the numbers listed in the
income statement projections above, the team assumes a pre-order number of

Pooja Paresh
Dante Smith
Noor Alajami
Stephanie Blitshtein
Aishwarya Ravindran
Ammar Hussain
Eyad Almasri
380,000 to account for cancellations. We also assume that half of the preorders
would be fulfilled in 2017 and the other half in 2018 based on a price of $34,000
(MSRP base price of $35,000 minus the $1000 pre-order price). To estimate the
remainder of 2018 sales, the team assumes that Tesla will meet their goal to
produce 500,000 vehicles in 2018 and multiply the difference between the
remaining pre-orders by the full MSRP base price of $35,000. From this point, we
then assume the historical growth rate of 35% through year 2020.
Although the Tesla-Solarcity deal is yet to close, the team feels it is relevant
to include estimated revenues from Solarcity based on the optimism of Elon Musk
that the deal will go through (Fortuna) and also a recent report by Institutional
Shareholder Services endorsing the deal (Welch). According to Tesla, Solarcity will
add half a billion dollars in cash to their balance sheet over the next three years and
add $1 billion in revenue in 2017. Shareholders of both Tesla and SolarCity will vote
for the deal on Nov. 17th.
Decreasing Expenses
The team believes Tesla will be able to materially cut costs in two ways going into
the future. This is by benefitting from economies of scale and also by cutting their
selling, general, and administrative expenses. Teslas Gigafactory, which opened
July 29th of this year, is estimated to begin producing car batteries around the
middle of 2017 and lead to a 30% reduction in the cost to manufacture batteries by
the time the factory is completed in 2020 (Desjardins). According to the Tesla main
website, the Gigafactory will produce batteries for significantly less cost using
economies of scale, innovative manufacturing, reduction of waste, and the simple
optimization of locating most manufacturing process under one roof. This would
affect production costs significantly, and this is reflected in the above exhibits of the
income statement and balance sheet.
Teslas most recent year end selling, general, and administrative expenses
were high relative to peers, at 23% of total revenues compared to the peer average
of 12% and a peer low of around 3%. We believe that as Tesla matures, they will
improve their operational efficiency and significantly decrease their selling, general,
and administrative expenses to around 5% of their total revenues by the year 2020.
We chose to rely on the historical growth rate for research and development
spending rather than change it based on the peer groups rates because we believe
that Tesla will continue to spend rather than cut costs here to maintain their status
as an innovative leader in the automotive industry.

RATIO ANALYSIS
The Tesla Team decided to analyze specific balance sheet, income statement and
operating ratios over time and compared to peer groups. The first ratio is the
inventory turnover ratio. The team believed that this ratio was crucial to analyzing

Pooja Paresh
Dante Smith
Noor Alajami
Stephanie Blitshtein
Aishwarya Ravindran
Ammar Hussain
Eyad Almasri
Teslas inventory management and strength of sales. This ratio shows how many
times Teslas inventory is sold and replaced over the year. Teslas inventory turnover
ratio has averaged 3.47. This means that the company must replenish their
inventory about three times per year. A target inventory turnover ratio for the auto
industry is about 6 (Maverick). In 2013, Teslas inventory turnover ratio was a high
4.58. This was a symbol of excellent sales and good inventory controls. However,
since 2013, the inventory turnover ratio has been below 4 and is expected to stay
around 3.67 up until 2020. Compared to industry peers, Daimler and BMW, Teslas
inventory turnover ratio is excellent! Both Daimler and BMW have negative
inventory turnover ratios. This signals that the companies are producing more cars
than they are selling. Their inventory levels are high because they are producing
without selling all that they produce. On the opposite end of the spectrum, Nissan
has inventory turnover ratios averaging over 11. This shows a sign of strong sales,
however, too high of an inventory turnover ratio can be a problem. For example, a
high inventory turnover ratio may mean that Nissan is not ordering or producing
enough vehicles in a single cycle which causes a shortage and eventually lost sales.
This type of inventory management would produce a high inventory turnover ratio
even though it is inefficient.

The second financial ratio the Tesla team chose was the gross profit margin.
The Tesla team decided to chose this ratio because it is a good indicator of a firms

Pooja Paresh
Dante Smith
Noor Alajami
Stephanie Blitshtein
Aishwarya Ravindran
Ammar Hussain
Eyad Almasri
financial stability. The gross profit margin shows the percentage of revenue left over
after COGS is accounted for. This profitability ratio is able to portray whether Tesla is
able to cover their operating expenses. Teslas gross profit margin averages
43.12%. Compared to their peer group, Teslas gross profit margin exceeded their
competitors. Daimlers gross profit margin was volatile. Their ratio jumped from 6%
in 2014 to 21% in 2015. Nissan and BMWs gross profit margin averaged about 20%
of revenues. Teslas gross profit margin was also much better than the industry
average of about 14% (Auto).

The final ratio the Tesla Team chose was the Accounts Receivables Days on
Hand (Days Sales Outstanding). Since Tesla is a very leveraged firm, holding a lot of
debt, we believed this ratio was important. The Days Sales Outstanding ratio shows
the number of days it takes a firm to collect their credit sales. This ratio is an aspect
of the cash conversion cycle. A low DSO means that the firm is collecting its
Accounts Receivables quickly. Teslas DSO averages about 11 days. Their highest
DSO in the past few years occurred in 2014 at 25.86 days. Of all the peer
companies, Nissans DSO is most similar to Teslas at about 27 days. Daimler and
BMW both have very large DSO. Daimlers DSO averages 103 days and BMWs DSO
averages 168 days. These high DSO numbers show that the company is only
receiving their accounts receivables payments about three times per year. This
could cause a huge strain on the companys ability to pay their own obligations. The
high DSO numbers for BMW and Daimler are most likely a result of the high price of
their products, specifically compared to Nissan. Tesla is doing well with their DSO,
especially because it is also a high-end car similar to BMW and Daimler but Tesla

Pooja Paresh
Dante Smith
Noor Alajami
Stephanie Blitshtein
Aishwarya Ravindran
Ammar Hussain
Eyad Almasri
manages to be paid much quicker than the competitors. Hopefully this low DSO will

help them pay off their debt in a timely and rapid manner.

OVERVIEW
After analyzing the financials of Tesla, we have come to a conclusion that Tesla
trades at a low price in comparison to its valuation. The companys financial ratios
are not only strong but perform better than their peers. In the near future, Tesla is
projected to be even more successful with the introduction of the Gigafactory, the
Model S, increased sales and decreased expenses. Based on our terminal growth
rate projections and discounted FCF model, we found that the stock is undervalued
in the market and now is the time to invest in the company. According to our
analysis, Tesla is a great company overall and a good investment.

BIBLIOGRAPHY
1) Auto & Truck Manufacturers Industry Profitability. Retrieved November
06,
2016,
from
http://csimarket.com/Industry/industry_Profitability_Ratios.php?ind=404
2) Desjardins, J. (2016). These 9 Slides Put the New Tesla Gigafactory in
Perspective.
Retrieved
November
09,
2016,
from
http://www.visualcapitalist.com/9-slides-put-new-tesla-gigafactoryperspective/

Pooja Paresh
Dante Smith
Noor Alajami
Stephanie Blitshtein
Aishwarya Ravindran
Ammar Hussain
Eyad Almasri
3) Fortuna, C. (2016, November 2). Tesla-SolarCity merger nearly a sure
thing: Musk pretty optimistic on shareholder approval. Retrieved November
9, 2016, from http://www.teslarati.com/elon-musk-optimistic-tesla-solarcitymerger/
4) Heisler, Y. (2016). Teslas Model 3 is officially sold out through mid2018. Retrieved November 09, 2016, from http://bgr.com/2016/10/18/teslamodel-3-reservations-delivery-mid-2018/
5) Maverick, J. (2015). Key Financial Ratios to Analyze The Automotive
Industry.
Retrieved
November
06,
2016,
from
http://www.investopedia.com/articles/active-trading/082015/key-financialratios-analyze-automotive-industry.asp
6) "Tesla Gigafactory." Tesla. N.p., Nov. 2014. Web. 05 Nov. 2016.
<https://www.tesla.com/gigafactory>.
7) TSLA Stock Quote - TESLA Price | Markets Insider. (n.d.). Retrieved
November 08, 2016, from http://www.quotenet.com/stock-price/TSLA
8) Welch, D. (n.d.). Tesla Shareholders Should Back SolarCity Merger, ISS
Says.
Retrieved
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09,
2016,
from
http://www.bloomberg.com/news/articles/2016-11-04/iss-recommends-teslashareholders-vote-for-solarcity-acquisition