Tesla Motors, Inc. Financial Analysis
Tesla Motors, Inc. Financial Analysis
Tesla Motors, Inc. was founded in early 2003 by a group of Silicon Valley engineers, incorporated in Delaware on July 1 of the same year, and is now headquartered in Palo Alto, California (“Tesla- Investor”). The company designs, develops and manufactures electric vehicles and electric vehicle powertrain components. Tesla also provides the same services and powertrain components to other manufacturers of electric vehicles (Analysts Corner 2). Tesla Motors is best known for producing the Tesla Roadster, an all electric sports car released in 2008, with outstanding performance results (“About Tesla”). Tesla has developed a unique marketing plan that differs from the traditional automotive industry by marketing and selling its products over the internet and through a global network of 32 stores that are owned and operated by Tesla. The company has 2,964 employees and has electric vehicles on the road in 37 countries around the globe (“About Tesla”; Analysts Corner 2).
On June 29, 2010 Tesla Motors Inc. became the first American car company to go public since the Ford Motor Company in 1956. The company offered 11.8 million shares priced at $1 above the initial offering at $17. The IPO was so successful that Tesla offered an additional 20% equity in the company by increasing the offering to $13.3 million shares to meet demand. The company raised a total of $226 million, the stock price soaring up 41% to $25 a share on opening day (Andrejczak). Today, Tesla Motors Inc. (TSLA) is traded on the NASDAQ stock exchange at a price of more than $180 a share. The stock has grown over 800% since its IPO and now Tesla has a market capitalization of over $22 billion. This impressive increase in stock price may come as a surprise to many investors due to the company’s earnings, or lack thereof. Given the current economic conditions, the relatively new market and existing competition; the Tesla stock price is grossly overvalued.
Tesla produces an outstanding product with an outstanding price tag. The new Tesla S was designed to compete in the luxury sports car arena along with BMW, Mercedes and Audi. Tesla has estimated that 21,000 Model S will roll out of its production facility in 2013 at a sticker price between $70,000 and $100,000 (Seetharaman; Finger). This year, Mercedes will sell 25,000 luxury sedans in that price range to U.S. consumers and BMW just slightly less than Mercedes (Finger). Tesla has estimated it will produce 40,000 Model S next year, almost twice the number of BMW’s sold in that price range. In the post recessionary economic climate of 2013, there is not a strong demand for vehicles in this price range, even with the $7500 tax credit offered to consumers. The Tesla Model S is still out of reach for most Americans.
There are more reasonably priced alternatives in the EV market such as the Nissan Leaf and the Chevy Volt, but sales have been sluggish (Stammers; Alpert). General Motors recently “announced a $5,000 formal price cut for the Chevrolet Volt plug-in hybrid” and Chrysler has opted to stay out of the EV market until “dragged there by consumers” (Buss). Since the key to the future profitability of Tesla Motors is in the mass production of an affordable EV, demand for the product becomes paramount. As Dale Buss, an automotive industry journalist explains; It’s one thing for Tesla to sell nearly 1,500 Model S a month at about $70,000 apiece in the U.S. market these days; when Elon Musk’s startup attempts to penetrate the lower part of the EV market with its own model, success will be a lot harder to come by.
(Buss) Tesla intends to meet that challenge with the 2016 release of the Gen. III., a Tesla EV with the range of a Model S, but half the price. The 200 mile range of a Tesla EV is what gives it a competitive advantage over other more affordable EVs, but at the cost of additional batteries (Alpert). The added cost of the batteries makes the target price next to impossible to reach, but necessary in order to avoid the fate of other affordable EVs, such as the Volt. So, rather than realize their goal ”to accelerate the world’s transition to electric mobility with a full range of increasingly affordable electric cars”(“Tesla Improves”), Tesla Motors is “helping create a highly bifurcated segment where only expensive EVs can achieve a feasible volume” while pushing affordable EVs and its own profitable future further out of reach (Buss).
Tesla Motors CEO, Elon Musk, maintains that there is still adequate demand for the Model S and that the company has received 10,000 orders in North America alone. The truth of the matter is that the true demand for EVs remains to be seen. In May of 2013, Tesla shocked analysts when it “stopped disclosing its end-of-quarter order backlog — which might have shed light on the issue — after previously trumpeting a 15,000-unit reservation list” (Alpert). Many of Tesla’s orders were cancelled due to the company’s price increases on options for the Model S, which added an average 8%-9% to the overall price and stirred up numerous customer complaints on the Tesla website blog (Finger; Blanco). Many consumers are interested in reducing CO2 and reducing our dependence on fossil fuels, but simply cannot afford the more expensive alternatives.
In an attempt to make Tesla vehicles more affordable and increase sales; Tesla Motors has partnered with U.S. Bank and Wells Fargo Bank to provide financing to qualified Model S customers that includes longer terms, lower payments and the Tesla resale guarantee. “Buying a Model S through the Tesla financing offering now comes with a guarantee that the resale value will be higher than that of BMW, Audi, Mercedes, Lexus or Jaguar” (“Tesla Improves”).
The guarantee is personally backed by the CEO of Tesla Motors “to give owners complete peace of mind about the long term value of the product” (“Tesla Improves”). Elon Musk, Tesla’s chief executive described the financing program during an interview; If our car was chiefly available for purchase and not by financing, I think that’s maybe accessible to roughly 1 million US households. A financed product with the right financing-fully optimized financing, I think it’s probably accessible to the top 10 million households. (Seetharaman)
Musk went on to report that since the finance program was implemented, the company has experienced “a meaningful increase in demand” that he estimates to be about 30,000 cars a year in North America (Seetharaman). There is little doubt that the Tesla financing program has boosted sales. “In the second quarter 30 percent of sales fell into this category” (Finger). Amazingly, against generally accepted accounting principles (GAAP), Tesla records the entire amount of the payment it receives from the bank as revenue. The bank pays the full amount of the car price to Tesla, but after the 3 year lease agreement ends, Tesla pays the outstanding balance of around $46,000 when it takes the car back as part of the buy-back guarantee.
According to GAAP, the $46,000 would be a debt until the bank has been paid. This method of recording debt as revenue makes Tesla look more appealing on the books. Meanwhile, Tesla builds up an expensive and costly inventory of used Model S sedans as it works hard to convince consumers that the model S should be replaced, which effectively lowers the value of their own used inventory. The buy back guarantee has the potential to become a serious liability for the new car company.
In an effort to promote the use of cleaner technology and improve the air quality in the state of California, law makers there have implemented a program whereby automobile producers can earn credits for every zero-emission-vehicle (ZEV) and partial-zero-emission-vehicle (PZEV) brought to or sold in the state. Manufacturers can only sell a certain amount of vehicles that don’t fall into this category. The manufacturers then have the option to purchase more credits from other companies in order to continue selling vehicles in California. Tesla earns credit every time the company sells a Model S and these credits are sold to competitors.
It has been estimated that for every Model S sold, Tesla receives between $25,000 to $35,000 worth of these credits and could contribute about $188 million in revenue for 2013 (Isidore). This year Tesla Motors Inc. reported its first profit in the first quarter and “better than projected earnings” for the second quarter (Isidore). A closer look at the source of that revenue reveals that it did not come from sales of vehicles, but actually from the selling of zero-emissions-credits. Tesla sold a total of $68 million worth of the credits, 12% of its total revenue in the first quarter (O’Brien). Despite the source of the income, Tesla Motors stock price rose 17% when the quarterly report was released (Seetharaman).
Another contributing factor to the run-away stock price is that historically Tesla stock has been a favorite amongst investors for shorting. One analyst at Barron’s reported that as much as 45% of Tesla outstanding shares were shorted until the first quarter earnings were released (O’Brien). When the stock began its climb, the short sellers were forced to buy back at higher prices than they had hoped to, which effectively drove the market price higher. Investors also responded favorably to the news that the Model S won The Car and Driver Magazine’s Car of the Year for 2013 and again when the Model S earned the highest score ever given to an automobile by Consumer’s Reports (O’Brien, Finger). The forward price earnings ratio for Tesla Motors is in the neighborhood of 170. A high price-earnings ratio suggests that investors are expecting future growth and earnings. An exceptionally high P/E is indicative of a speculative bubble and overvaluation.
Market Capitalization for Tesla Motors Inc. has doubled within the last couple months and is now over $22 billion. The value of an enterprise for profit is dependent on what it can produce or profit from moving forward into the future, and in doing so increase the wealth of the ownership. Tesla Motors will produce roughly 20,000 cars this year and plans on doubling that output for 2014. That makes every car Tesla produced this year worth $1.1 million of stock. Compare that number to “luxury automaker BMW that has a market cap of$52.79 billion on global sales of 1.85 million cars or $28.53 thousand per car.
Mercedes Benz produces cars at $43.4 thousand per car using the same calculation (Finger). Tesla will have to produce hundreds of thousands of vehicles to support a stock price even half of what it is currently. With the limited amount of demand at the current price, the stock can soar as high as the market will allow it, but the price will have no foundation and will eventually crumble down. The over-valuation leaves Tesla poised for a buyout or takeover by a larger manufacturer.
Tesla Motors is obviously good at what it does. The technology developed by the company is being used by other more established automobile makers, such as Toyota and Daimler. The problem with specialization is that it leaves a company, especially a large one, vulnerable to changes in technology, market shifts and consumer sentiments. Tesla has all of its eggs in one basket. A significant shift in the market, a radical change in technology or even consumers warming to the hybrid concept before taking to the electric one; would be the end for the new car company. It seems that Tesla has nothing to fall back on, no contingency or alternate plan.
Although Tesla has taken the electric vehicle to new heights, the technology is not break-through and the concept is not mind blowing. The whole package is a winning combination, in a small segment of the market. The company may be headquartered in California and founded by geeks, but it is still an automobile producer. The automotive industry is dominated by an oligopoly of corporations that historically have been successful at weeding out smaller companies just like Tesla Motors. The competition is fierce and the pockets are deep, economies of scale are a reality in automobile manufacturing. The patents and proprietary technology that Tesla holds right now will be meaningless in a matter of a few years, or several months.
If the demand for electric cars increases significantly, Tesla will be forced to compete. Without the differentiation that Tesla has now, the company doesn’t have much of a chance. Tesla has a challenging future; in order to survive it must lower its costs and crank up production. The niche market of wealthy movie stars that want to be seen in a Tesla Roadsters isn’t going to get them there. The high price people are willing to pay for their stock isn’t going to either.
Tesla Motors Inc. produces amazing all electric vehicles that are sporty, luxurious, and state of the art. The company’s CEO and spokesperson, Elon Musk is an innovative billionaire, who is enthusiastic, confident, and as cool as the Tesla Roadster. The company has turned the automotive industry upside-down and investors want a piece of it. The stock price is just waiting for another promising news story or SEC filing to soar even higher.”Tesla is, according to all the critics, an incredible car, but it is a company held together with financial bubblegum” (Finger). The only question is when will the bubble burst?
“About Tesla Motors.” Teslamotors.com, 2013. Web. 23 Sep 2013. . Alpert, Bill. “Recharge Now!.” Online.barrons.com, 2013. Web. 24 Sep 2013.