TESLA VALUATION MFIN 823 GROUP RESEARCH PROJECT

GROUP 7Mark Moskvitine

Liya PanBadri Varadarajan

Chen Zhou

2

OVERVIEW

MARKET PRICE: $256.76/share*

TARGET PRICE: $216/share

RECOMMENDATION: SELL

* As of Aug 19, 2014

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

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

5

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

6

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

7

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

8

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

9

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

10

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

11

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

12

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

13

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

14

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

15

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

16

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

17

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

18

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

19

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

20

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

21

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

22

QUESTIONS

GROUP 7

Mark MoskvitineLiya PanBadri VaradarajanChen Zhou

TARGET PRICE: $216