IMAGE TBC

TESLA’S VALUATION & FINANCIAL

MODELING
SAMPLE VALUATION & MODELING
JUNE 2021
2 TESLA VALUATION & FINANCIAL MODELING

Company Valuation and Financial Modeling

1. INTRODUCTION
A good company valuation consists of various stages. These stages include industry analysis,
company analysis, product positioning, gathering of financial information, hypothesis, and
scenarios (assumptions) and finally financial modelling.

1.1. INDUSTRY ANALYSIS

Understand the mechanics of the industry and the way value is created for customers. Industry
trends, patterns and history influence this stage. We must trace which are the industry players
and what is their value proposition. It is also important to acquire an idea of what is expected to
come next in the given industry (future). Is it a mature or growth industry? Is it a cyclical
business? Usually, the five forces model of Michael porter is used to describe a given industry.
According to Porter’s model, the intensity of competition in an industry is determined by five
forces:

 Traits of new entry to the market

 Pressure from substitute products
 Bargaining power of Customers
 Bargaining power of suppliers
 Degree of competition from existing competitors.

1.2. COMPANY ANALYSIS

We must get to know well the company. Its stage of development and we must perform a SWOT
analysis. We can infer the prospects of its business by performing a life cycle model. By
performing company analysis, we will be able to answer questions like.

 Is the company’s competitive formula a valid one?

 Are there sustainable competitive advantages the company can rely on?

These questions are answered by doing SWOT analysis.

1.3. PRODUCT POSITIONING

According to strategy guru Michael porter, there are three types of positioning a company can
choose for its products:

 Cost leadership
 Differentiation
 Niche Products

Significant value is added to the analysis if the strategic positioning of a company’s products is
analysed. For example, it is questionable to make hypotheses of increasing margins if the
company is oriented towards cost leadership.

1.4. GATHERING OF FINANCIAL INFORMATION

We must collect the company’s financial reports and analyse them. We can analyse the publicly
available financial data and check whether the financial statements are clean and coherent if it
is a publicly traded company. We need to be certain that the data between various years is
consistent. Examples of events which can pollute the quality of data are significant write offs,
extraordinary business, M&A activity, and others. We must understand if there are none
operational items and exclude them from our valuation because they are valued separately. This
is hard to do if we do not perform a proper due-diligence and without access to the company’s
management. Once the financial statements are clean and ready to use, we need to calculate
historical ratios for P&L and BS items. We must remember that sometimes, history is a good
proxy for the future.

1.5. BUILDING HYPOTHESIS AND SCENARIOS (ASSUMPTIONS)

We must build scenarios for the future development of the firm’s business and financials. Often,
we use the top-down or the bottom-up approaches. The most important element for the whole
prediction is the view for the top-line of the business. Revenue development is key and very
often used as driver for the rest of items in the model. Based on historical data, product
positioning and market research, analysts can build an idea for future revenues. Very often, the
top-down and bottom-up approach are used. the difference between them is the first estimates
what portion of the total market will be taken by the company. While the second starts from low
estimating how many pieces of a product will a company sell at a given price and multiplying
that by the number of potential customers and thus arriving to revenue. Depending on how
sophisticated the model is, there could be some scenarios in it. Scenarios could approximate the
outcome of different events. For example

 Scenario One – Successful internationalization of the company

 Scenario two – unsuccessful internationalization of the company.

Hypotheses need to be made regarding many items like.

 Cost of capital
 Working capital needs
 PP&E investments etc.

1.6. FINANCIAL MODELING

Financial modeling is all about providing a correct mathematical output of the work that has
been done previously. A financial model must be flexible, clear, precise, and easy to understand
by outside users. Usually, a valuation model includes sensitivity analysis which helps decision
makers to gain a better understanding regarding the influence of various parameters. A quality
financial model allows users to work with different scenarios.

2. FINANCIAL MODELING

2.1. INTRODUCTION
In this document we will do a financial valuation and modelling for Tesla company. Before we
start, we should know the technical stages of a valuation. As a source we will use historical
evidence and data to make assumptions of the future.
 I. P&L Assumptions
 We will perform top line projections.
 We will calculate historical ratios for the items and model their development.
 Forecast of the rest P&L items.
 And we will model the scenarios.
 Put explicit time frame for the projections.
II. BS Assumptions
 Forecasting through the number of “days”
 Will include the hypothesis the development of various BS items.
 Usually, BS items develop in line with the business.
 Building scenarios for them is not critical.
 Forecasting as a % of revenues
III. P&L output
 An output sheet showing clean P&L numbers
 It’s the outcome of the P&L assumptions.
 It is obviously linked to the P&L assumptions sheet.
IV. BS Output
 An output sheet showing clean BS numbers.
V. Cash Flow
 Calculate cash flows throughout the explicit forecast period.
 The necessary inputs for Cash flow sheet are the P&L output sheet and the BS
output sheet.
VI. Discounted Cash Flow
 Discount the cash flows during the explicit forecast period and calculate the
terminal value of the business, which results in enterprise value.
 Most of the DCF mechanics are done the DCF valuation sheet,
 Cashflow calculated previously are used as inputs here.
 In this sheet, we will discount unlevered free cash flow, calculate continuing
value of business & calculate the enterprise and equity value.

In addition to this, we will also have a sheet showing the graphical representations of our results
(charts). At the end of the file, we also must add a data file that will show the sources we used
for the valuation & modelling.

2.2. TESLA’S VALUATION

Organizing External Inputs in a Driver’s Sheet

 Put a selected case with three options. This will help us change scenarios and analyse the
outcome on the model. We usually have three cases.
 Optimistic Case (1) – We choose all the variables in a way that is best for
the company. These variables might be revenue growth etc.
 Base Case (2) – We adjust all variables to the historical average of the
company.
 Worse Case (3) – All variables are adjusted in the worst-case scenario.
 We will choose a currency.
 We will input the 10-year currency yield as of the day we design the model.
 We will input the market risk premium.
 We will input the company’s beta.
 We will input the company’s share price of the day we design the model.
 We will input the company’s bond yield.
 We will input the corporate tax rate of the country.
  And finally, we will input the expected inflation of the country’s currency.

Historical Inputs
This are the P&L and the BS data extracted from the annual report submitted by tesla to the
SEC. These documents are available for all interested people (investors) and can be found on the
SEC website. We can calculate the company’s KPI’s from this data. These KPIs include general
terms and specific ones that are unique for that company and its industry.

Forecasting Tesla’s Delivery

The working tab in the excel sheet will help us separate the historical inputs and the model’s
actual working where we will make assumptions and work predicting the company’s future. It is
also wise to add another layer to keep things clean and organize. And since Tesla has three
business lines, it is also wise to add another to differentiate one from another. So, we have
WORKINGS – INCOMESTATEMENT ITEMS – AUTOMOTIVE.

 Automotive - This business unit is by far the biggest in generating revenue. It accounted
more than 80% of the revenue in 2017. The starting premise of the forecasting of the
revenue is

Revenue = Number of Vehicles Delivered X Average Price

The first thing we must do then is to find out how many vehicles will be delivered. And
before we do that, we must find out which vehicle models will be delivered in the next
10 years. The difficult task is to estimate the number of vehicles that will be sold in the
first year and their y-o-y growth of the models that have not been available yet. We must
do research for this part to paint a more accurate picture. After forecasting the delivery
figures of tesla in the next 10 years, we must compare delivery figures with other
industry titans to make sure our assumptions and projections are accurate and paint a
good picture. Good research increases the quality of the model.

After we have finished forecasting the number of vehicles delivered in the forecasting
years, we will set an average price for each vehicle. After that we will get the revenue
from every car during the forecasting years. It is wise to add a little sophistication and
add scenarios as mentioned above as our goal is to build a model which is flexible.

The Gross profit margin is adjusted according to previous historical data as well as
comparing it to other industry comparable products to have an accurate picture. The
profit margin is also adjusted to the cases we have shown earlier. Using more industry
comparable products, the better our model will be. We need to adjust our best, base &
worst case scenario for the gross profit assumptions. This will give our model a flexibility
which will give it durability.

For the cost of sales, we will use the gross profit and the total revenue. All we do is take
the difference between the revenues and gross profit. We will add a minus (-) sign so
anyone can understand this a cost.

Cost of Sales = Revenue – Gross Profit

 We can add charts to make our model more attractive for those who will see it. We can
use excels analyse data option.

 Energy – The revenue from energy & services in the second half of 2018 is assumed and
forecasted to be the same as first half of 2018. We used a conservative revenue growth
for total energy revenue to be more prudent and to avoid being too optimistic about the
sector. We will adjust the percentage according to the base, best & worst case scenario
option. The gross profit is calculated by finding the average for past years and using that
as a base case scenario. Best and worst case scenario can be found by +- 2% from the
base case scenario.

 Operating Expenses (Opex) – It is the cost that a business incurs during the process of
performing normal business operations. Most costs that aren’t associated with cost of
goods sold are considered Opex.

 OPEX =/ Cost of Sales

 Examples of Opex
 R&D
 Accounting
 Top Management Rent
 Utilities
 Sales
 Show Rooms
 Advertising etc
It is adjusted to the three scenarios which are base, best & worst-case scenario. Even
though tesla isn’t that much of a young company, it is also not a mature company yet.
Chances are it will soon benefit from the economies of scale larger auto producers
benefit from. Such economies of scale help companies by decreasing fixed costs and
increasing the volumes sold. The price for this will be higher P,P &E investment. The
Opex to revenue percentage will decrease as companies reach a higher economy of scale.
Comparable data from other industry competitors will help paint a much more accurate
picture.

 Fixed Asset Rolled Foreward – We should know that the formula for end of forecast year
PP&E is

Ending PP&E = Beginning PP&E + Capex – D&A

The more a company spends. Forecasting PP&E is the most challenging task involved in
Three statement integrated valuation. This forecasting links BS & PL statements. The
more a company spends on Capex & the less its assets (depreciate) the higher the ending
PP&E will be. And the opposite will lead to lower ending PP&E.

There are two main ways of forecasting Capex

 Model Capex as a percentage of beginning PP&E
 Model as a percentage of Revenues.

So if the starting PP&E is high and assets are amortized at a slower rate, it means that
the Capex will grow in time (as is it is the case with our Tesla Model).
 We could also use revenue as a driver. This makes sense as Capex investment goes hand
in hand with growing revenue. As a company makes more money, it will also look to
invest the money to bring more money in. But in a way, this will also penalize the
company as we are assuming the company will spend money in Capex no matter the
circumstances. This is rarely the case.

In this model, we chose scenario one as our primary, but we will also use the choose
function to model the second option.

For scenario one, we calculated the historical average percentage of Capex to PP&E and
used it for 2018 forecast. And we decreased that every year by 20% till it reached 20%
and that was the percentage for every year after that point.

For Capex as a percentage of revenue, we calculated the average and we used that every
year till 2020 and after that to offset for the growth in revenue, we decreased till we
reached 10% and it was kept constant after that.

Perform a sanity check.

 Calculating DSO, DIO & DPO – We use the average to forecast the days.

Net Trade Cycle = DP